Level 3 Income and CEO Cash Compensation in the Financial Industry

Chaur Shiuh Young, Liu Ching Tsai, Hui Wen Hsu

Research output: Contribution to journalArticlepeer-review

Abstract

This article examines the role of fair value gains or losses related to Level 3 valuations in CEO cash compensation for U.S. financial firms. Our results show that Level 3 income is compensation-relevant. By separating Level 3 income into unrealized and realized Level 3 income, we find that CEO cash compensation is less sensitive to unrealized than realized Level 3 income, which indicates that compensation committees have a higher concern for the clawback problem associated with unrealized Level 3 income. A further analysis separating Level 3 income into positive and negative components shows that Level 3 losses are more compensation-relevant than Level 3 gains, thereby validating the argument that Level 3 losses are more credible than Level 3 gains. Overall, we find that Level 3 income is relevant for CEO cash compensation and that this phenomenon is mainly driven by its realized and loss components.

Original languageEnglish
JournalJournal of Accounting, Auditing and Finance
DOIs
Publication statusAccepted/In press - 2022

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics, Econometrics and Finance (miscellaneous)

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