Is Accounting Information Quality Priced in Managerial Labor Market

We study whether accounting information quality (AIQ) is priced in the executive labor market. Focusing on externally hired CEO compensation at their initial appointment, we find a 7.38% pay premium for a one-standard deviation decline in AIQ measured in the years preceding the appointment. This result is robust to the inclusion of a comprehensive set of variables reflecting the characteristics of compensation contracts, executives, firms, industries, and states, and three alternative measures of AIQ. Thus our findings are unlikely driven by omitted correlated variables or measurement errors of AIQ. Additional evidence suggests job security concern and accounting failure risk might be the channels to explain the pricing premium for poor AIQ. We also find firms with less effective boards have lower sensitivity of compensation to AIQ, suggesting that private benefits might offset pay premium required by a CEO for low AIQ. Finally, we show the pay premium-AIQ relation is stronger for young CEOs and for CEOs with outside employment restriction, lending further support to the job security mechanism.