Stewardship Value of Income Statement Classifications : An Empirical Examination

This study investigates the use of earnings components in setting CEO compensation and explores how persistence and controllability affect it. The results indicate that compensation committees do accord differential treatment to earnings components based on their persistence and controllability. Among above the line items, income from continuing items, the most persistent item, also receives the most weight, followed by special items which have smaller persistence. Further, these weights vary across firms in different stages of life cycle in a manner that mirrors variations in their informativeness and persistence. Among below the line items, discontinued items, which are at least under partial control of the CEO receive a positive weight. Except extraordinary items which are largely uncontrollable, we find no evidence that CEOs are shielded from the income-decreasing effects of any of the earnings components