Publications

Carter, M.E., L.F. Lee, E. Yu. “Real Effects of the Proposed Scope 3 Disclosures”, Journal of Accounting and Economics, forthcoming. 

We examine whether the threat of requiring Scope 3 emissions disclosures increases affected firms' preference for greater control over production and GHG emissions, which renders outsourcing to foreign countries less desirable. Using the SEC's March 2021 request for input on climate-related disclosures as a shock to the probability that Scope 3 emissions disclosures would be required, we find that affected firms reduce imports relative to unaffected firms. The reduction is concentrated in firms for which disclosing Scope 3 emissions are likely costlier and among firms with greater ability to reduce foreign outsourcing. Further, the reduction is more pronounced among firms facing Scope 3 disclosure pressures from the EU and California. Finally, we find some evidence that affected firms increase in-house production and improve their environmental efforts. Collectively, our findings suggest that the threat of Scope 3 disclosures induces real changes in corporate operations. 

Carter, M.E.. “What Director Experience Matters: A Discussion of Donelson, Hutzler and Rhodes (2025)”, Journal of Accounting and Economics, forthcoming. 

Donelson, Hutzler, and Rhodes (this issue) examine the impact on firms’ corporate governance of increased government antitrust enforcement against competitor interlocking directors. While these directors could facilitate collusion among firms, raising antitrust concerns, they also bring crucial industry expertise that enhances corporate governance. The authors find enhanced enforcement led to voluntary reductions in these directors. Given that these directors are associated with improved firm performance, investment efficiency, and CEO monitoring, the authors suggest that this enforcement will impair corporate governance. I discuss concerns around the narrow definition of director experience that limits the interpretation of the findings. I also discuss several open questions raised by the study and the opportunity this study provides to contribute to research on common ownership. Throughout I propose questions that future research might explore which would enhance our understanding of competitor interlocking directorates. 

Carter, M.E., Laviers, L., Sandvik, J. and D. Xu. “CEO Pay Ratio Disclosures and Changes in Employee Pay Satisfaction”, Management Science, forthcoming. 

We study whether CEO pay ratio disclosures were informative to employees about their own pay by estimating the impact of the disclosures on employee pay satisfaction. Exploiting the staggered timing of the pay ratio disclosures, we find that employee pay satisfaction increased after their firms' disclosures, as measured by their ratings of their firms' compensation and benefits on Glassdoor. We show that these findings are not driven by alternative information in proxy statements, general trends in employee satisfaction, ratings manipulation, or concurrent changes in employee pay levels. Instead, we posit that the new information in the disclosures about median worker pay levels caused employees to perceive their own pay levels more favorably. Consistent with this explanation, we find that the increases in pay satisfaction are greatest within firms that had relatively small median worker pay levels and those that had relatively opaque pay information environments before the disclosure. Overall, our findings reveal a positive externality of the SEC's mandate on human capital disclosures, potentially informing future policy making. 

Albuquerque, A., M.E. Carter, Z. Guo, and L. Lynch. “Complexity of CEO Compensation Packages”, Journal of Accounting and Economics 79 (1), 2025.

This paper examines complexity in CEO compensation contracts. We develop a measure of compensation complexity and provide empirical evidence that complexity has increased substantially over time. We document that complexity results not only from factors reflecting efficient contracting, but also from external pressures from compensation consultants, institutional investors, proxy advisors, and attempts to benchmark to peers, with these external factors having greater impact in more recent years. Examining consequences of contract complexity, we find an association with lower future firm performance that is related to the influence of external factors on compensation design. We further find this relation is partially mitigated when a contract's performance metrics are more highly correlated, consistent with information processing costs hampering decision-making. Collectively, these findings confirm concerns raised by investors and the media regarding compensation complexity and can inform boards in their design of CEO pay packages. 

Albuquerque, A., R. Albuquerque, M.E. Carter, and F. Dong. “How Large is the Pay Premium from Executive Incentive Compensation? ”, The Accounting Review 99 (5). September 2024. 35-64.

We estimate the pay premium associated with CEO incentive compensation. Using explicit detailed U.S. CEO compensation contract data and simulation analysis, we find that CEOs with riskier pay packages receive a premium for pay at risk that represents 13.5 percent of total pay. The premium is positively correlated with proxies for CEO risk aversion, but implied risk aversion values suggest that the premium is economically smaller than suggested by prior studies. We perform our tests using a variety of proxies to measure the variance of pay and find consistent evidence of economically small pay risk premiums. These results are consistent with recent findings suggesting that risk may have a more limited influence over the level of pay than previously thought. 

Carter, M.E. and R. Speklé. “Management Control During and After a Crisis: Taking Stock and Looking Ahead”, Journal of Management Accounting Research 36 (3). Fall 2024. 67-71. 

In this introductory article to the Special Interest Forum, we provide a broad overview of the literature on management control during times of crisis. We discuss key themes from studies that emerged following the financial crisis, as well as existing research addressing the management control implications of the COVID-19 pandemic, to offer a background for the papers in the Special Interest Forum. The articles in this Forum highlight the critical role of human capital during crises and emphasize how management control can help mitigate the negative impact of a crisis. 

Carter, M.E., L. Lynch and X. Peng. “COVID-19 Motivated Changes to Executive Compensation and Incentives”, Journal of Management Accounting Research 36 (3). Fall 2024. 115-133. 

We provide new insights into companies’ decisions to cut CEO pay during the COVID-19 pandemic by comparing 482 firms announcing CEO salary cuts with those that do not. We find that salary cuts are more prevalent in firms with poor pre-pandemic performance, lower cash holdings, employee layoffs, and better governance. Shareholders appear to view these cuts favorably in firms with higher CEO pay ratios and those that are the first among their peer firms to make such an announcement. These findings suggest that pay cuts reflect efforts to adjust pay efficiently in response to changes in contracting environments and to lend legitimacy to other difficult decisions that firms face, alongside governance characteristics. We also find that CEO salary cuts coincide with well-timed equity grants that appreciate in value more than those in noncutting firms and with a shift away from earnings-based metrics in performance-based incentive plans. 

Carter, M.E., M. Martin, and L. Lynch. “Board Committee Overlap and the Use of Earnings in CEO Compensation Contracts”, Management Science, 68 (8), August 2022: 6268–6297.

Using proxy statement data describing the terms of compensation contracts, we examine how overlapping membership between compensation and audit committees influences the use of earnings metrics in compensation. While research predicts that such overlap could either increase or decrease the reliance on earnings, we find that firms with overlapping directors rely less on earnings-based performance measures in incentive contracts without altering the overall level of performance-contingent cash bonuses. In addition, we provide evidence that firms substitute earnings measures with measures less subject to earnings management. Our findings are robust to potential alternative explanations, extend to an implicit relation between earnings and compensation for a larger sample, and are not driven by the tendency towards an overlapping committee structure more broadly.

Carter, M.E., J. Choi, and K. Sedatole. “The Effect of Supplier Industry Competition on Pay-for-Performance Incentive Intensity”, Journal of Accounting and Economics 71 (2-3), April-May 2021.

We examine how supplier industry competition affects CEO incentive intensity in procuring firms. Using Bureau of Economic Analysis data to compute a weighted supplier industry competition measure, we predict and find that higher supplier competition is associated with stronger CEO pay-for-performance incentive intensity. This effect is incremental to that of the firm’s own industry competition previously documented and is robust to alternative measures of supplier competition and to exogenous shocks to competition. Importantly, we show that performance risk and product margin act as mediating variables in the relation between supplier competition and CEO incentive intensity providing support for the theory underpinning our finding. We document that CEO compensation contracts are used as a mechanism to exploit the market dynamics of upstream industries to a firm’s benefit. Our findings are economically important as suppliers provide, on average, 45 percent of the value delivered by procuring firms to the market (BEA, 2016).

Cadman, B., M.E. Carter, and X. Peng. “The Participation Constraint and CEO Equity Grants”, The Accounting Review 96 (1), January 2021. 67-89.

We examine whether firms benchmark annual equity grants to compensation peers and whether meeting the participation constraint is a motive. Studying CEO equity grants over the period of 2006–2016 and compensation peers disclosed by the firm, we find that equity grants by these peers significantly determine a firm’s equity grants. We find no evidence that the relation between a firm’s and its peers’ CEO equity grants is an indirect outcome of meeting peer total compensation levels. In contrast, we show that firms are more likely to meet peer equity grant levels when the labor market is more competitive and when losing key personnel is a risk factor. We also find that CEO turnover is more likely when the CEO receives lower equity grants than peers. Collectively, these findings are consistent with the theoretical prediction that benchmarking equity grants helps firms satisfy the participation constraint, which varies with performance.

Carter, M.E., F. Franco, and M. Gine. “Executive Gender Pay: The Roles of Female Risk Aversion and Board Representation.” Contemporary Accounting Research, 34 (2) 2017: 1232-1264.

Using a large sample of executives in S&P1500 firms over 1996-2010, we document significant salary and total compensation gaps between female and male executives and explore two possible explanations for the gaps. We find support for greater female risk aversion as one contributing factor. Female executives hold significantly lower equity incentives and demand larger salary premiums for bearing a given level of compensation risk. These results suggest that females’ risk aversion contributes to the observed lower pay levels through its effect on ex-ante compensation structures. We also find evidence that the lack of gender diversity on corporate boards affects the size of the gaps. In firms with a higher proportion of female directors on the board, the gaps in salary and total pay levels are lower. Together, these findings suggest that female higher risk aversion may act as a barrier to full pay convergence, despite the mitigating effect from greater gender diversity on the board.

Carter, M.E., L. Li, A. Marcus, and H. Tehranian. “Excess Pay and Deficient Performance.” Review of Financial Economics, 30 2016: 1-10.

We investigate the link between abnormal CEO compensation and firm performance, asking whether high unexplained compensation relative to several benchmarks is a sign of hard-to-measure but desirable executive attributes or is instead a symptom of unsolved agency problems. We find that abnormally high CEO pay predicts worse future firm performance. Abnormally high compensation that is performance-contingent is a less ominous signal about the future success of the firm. But abnormal levels of even performance-contingent compensation predict worse future performance. We conclude that abnormally high CEO pay can be useful as an independent indicator of agency problems.

Albuquerque, A., Carter, M.E., and L. Lynch. “Do Shareholders Welcome Court Intervention in CEO Pay Matters?” European Accounting Review, 24 (4) 2015: 667-658.

We show that shareholders in non-banking firms with high excess pay respond negatively to an unanticipated court ruling against Citigroup related to CEO pay. But we find a positive reaction in firms for which high pay is accompanying poor performance. This evidence suggests that, overall, shareholders may perceive court intervention as net costly but not when excess pay is more egregious (in poorly performing firms). We also find that firms with excess pay and whose shareholders welcome intervention reduce future pay, suggesting that the threat of court intervention may control excess pay.

Bushee, B., Carter, M.E., and J. Gerakos.  “Institutional Investor Preferences for Corporate Governance Mechanisms”, Journal of Management Accounting Research, 26 (2), 2014: 123-149.

We use revealed preferences to identify a group of “governance-sensitive” institutions that exhibit persistent associations between their ownership levels and firms’ governance mechanisms. We find that firms with a high level of ownership by institutions sensitive to shareholder rights have significant future improvements in shareholder rights, consistent with institutional activism. Further, we find that large institutions, those with large portfolios, and those with preferences for growth firms are more likely to be sensitive to corporate governance mechanisms, suggesting those mechanisms may be a means for decreasing monitoring costs. Our results suggest that common proxies for governance sensitivity by investors (e.g., legal type, blockholding) do not cleanly measure governance preferences.

Cadman, B., and M.E. Carter. “Compensation Peer Groups and the Relation to Executive Compensation”, Journal of Management Accounting Research, 26 (1), 2014: 57-82.

We examine how peer groups are selected to set executive compensation and, in contrast to other research, we find no evidence that these groups are chosen to opportunistically increase CEO pay. We document that the researcher-defined pool of potential peers significantly influences the conclusions. When the potential peers are culled to a group that might better reflect the CEO labor market, opportunism is not evident, even in settings in which we would most expect opportunism.

Cadman, B., Carter, M.E. and L. Lynch. “Executive compensation restrictions: Do they restrict firms’ willingness to participate in TARP”, Journal of Business Finance & Accounting 39 (7 & 8), 2012: 997-1027.

We find that the executive compensation restrictions associated with the Troubled Asset Relief Program (TARP) influenced participation in the program. Banks were less likely to participate in TARP when there was greater potential impact of the pay restrictions and, among banks participating, those with greater CEO incentive compensation repaid funds more quickly. We also find greater executive turnover in participating banks, consistent with concerns about talent drain. We also find evidence that some banks may have declined funds to preserve CEO pay. But those banks had no worse financial health or lower lending, suggesting that the compensation restrictions may have allowed the government to allocate funds more effectively.

Cadman, B., Carter, M.E. and S. Hillegeist. “The Incentives of Compensation Consultants on CEO Pay”, Journal of Accounting and Economics, April 2010: 263-280.

We examine whether compensation consultants’ potential cross-selling incentives explain more lucrative CEO pay packages. Critics allege that these incentives lead consultants to bias their advice to secure greater revenues from their clients. However, among firms that retain consultants, we are unable to find widespread evidence of higher levels of pay or lower pay-performance sensitivities for clients of consultants with potentially greater conflicts of interest.  Overall, we do not find evidence that potential conflicts of interest between the firm and its consultant are a primary driver of excessive CEO pay.

• Cited in Securities and Exchange Commission Release 33-9089 (2010)

Carter, M.E., Ittner, C. and S. Zechman. "Explicit Relative Performance Evaluation in Performance-Vested Equity Grants" Review of Accounting Studies 14 (2-3), 2009: 260-306.

We examine factors influencing explicit relative performance evaluation (RPE) conditions in performance-vested equity grants for FTSE 350 firms. We provide evidence that efforts to improve incentives by removing common risk are more closely related to specific relative performance conditions than to the firm-level decision to use RPE in some or all of their equity grants. We also find that greater external monitoring by institutional investors is associated with more stringent overall RPE conditions.  The relative performance conditions are binding in most RPE plans, with nearly two-thirds of the grants vesting only partially or not vesting at all.

• Best Paper at the Review of Accounting Studies Conference (2008)

Carter, M.E., Lynch, L. and S. Zechman.  "Changes in Bonus Contracts in the Post-Sarbanes-Oxley Era”, Review of Accounting Studies 14 (4), 2009:  480-506.

We examine and find support for the joint hypothesis that the implementation of Sarbanes-Oxley and related reforms led to a decrease in earnings management and that firms responded to the reduced discretion by placing more weight on earnings in bonus contracts.  We find no evidence that firms changed compensation contracts to compensate executives for assuming more risk.

• Winner of the Glenn McLaughlin Prize for Research in Accounting Ethics (8thAnnual) under prior title, “The Relation between Executive Compensation and Earnings Management:  Changes in the Post-Sarbanes-Oxley Era” (2006)

Carter, M.E., Lynch, L. and I. Tuna. “The Role of Accounting in the Design of CEO Equity Compensation”, The Accounting Review, March 2007:  327-358.

We find that proxies for financial reporting concerns are positively associated with the use of options and negatively associated with the use of restricted stock in CEO pay packages. These finding suggest that the accounting under SFAS 123 led to greater use of options and lower use of restricted stock than would have been the case absent accounting considerations. We corroborate our results by examining firms that begin to expense options in 2002 and 2003 and find they reduce the use of options and increase the use of restricted stock after expensing options. These firms, however, do not reduce overall CEO compensation, suggesting that they find it difficult to downsize hefty pay packages that may have resulted from the favorable accounting for options. 

Carter, M.E. and L. Lynch. “The Effect of Stock Option Repricing on Employee Turnover”, Journal of Accounting and Economics, February 2004: 91-112.

Using a sample of firms that reprice stock options in 1998 and a sample of firms with underwater stock options that choose not to reprice, we find little evidence that repricing affects executive turnover. However, using forfeited stock options to proxy for overall employee turnover, we find that subsequent employee turnover is negatively related to the repricing, suggesting that repricing helps prevent lower level employee turnover due to underwater options.

• Featured in MIT Sloan Management Review, “Does Repricing Stock Options Work?”, Winter 2004

Balachandran, S., Carter, M.E. and L. Lynch, “Sink or Swim:  Firms’ Responses to Underwater Options”, Journal of Management Accounting Research, 2004: 1-18.

Using a sample of firms with underwater options in 2000, we estimate that 81 percent of firms take action to respond to them. Opponents argue that addressing underwater options rewards poor performance and transfers wealth unjustifiably from shareholders to executives. We find some support for this argument in that firms with weaker governance structures are more likely to reprice underwater options. However, we also find evidence that restoring incentives, retaining executives, and insulating executives from market‐wide or industry‐wide factors beyond their control are the primary drivers of firms' responses.

Carter, M.E. and L. Lynch. “The Consequences of the FASB’s 1998 Proposal on Accounting for Stock Option Repricing”, Journal of Accounting and Economics, April 2003: 51-72.

We examine repricing activity surrounding the FASB’s 1998 announcement regarding accounting for repriced options. We find that repricing increases during, and decreases after, the 12-day window between the announcement and proposed effective dates, consistent with firms timing repricings to avoid recording an expense. Firm with increasing earnings patterns, firms with earnings around zero, and growth firms are more likely to reprice in the window, but having repriced recently decreases the likelihood of doing so. Our evidence suggests that firms trade off financial reporting benefits against reputation costs in decisions to time repricings to get favorable accounting treatment.

• Featured in Financial Times, “Taking Stock of Sinking Options”, March 31/April 1, 2001.

Carter, M.E. and L. Lynch. “An Examination of Executive Stock Option Repricing”, Journal of Financial Economics, August, 2001:  207-225.

Comparing a sample of firms that reprice executive stock options in 1998 to a control sample of firms with out-of-the-money options in 1998 that do not reprice, we find that the likelihood of repricing increases for young, high technology firms and firms whose options are more out-of-the-money. Further, we find that firms reprice in response to poor firm-specific, not poor industry, performance. However, we find no evidence that repricing is related to agency problems. Our results are consistent with firms repricing options to restore incentive effects and to deter managers in competitive labor markets from going to work for other firms.

Carter, M.E. and B. Soo. “The Relevance of Form 8-K Reports”, Journal of Accounting Research, Spring 1999: 119-132.

We investigate the timeliness and information content of a sample of Form 8-K reports filed in 1993 with the Securities and Exchange Commission (SEC).  We find that 26% of our sample filed beyond the statutory due date, with negative news filings having noncompliance rates over 30%. Voluntary disclosures of significant events, despite having no deadline, were among the fastest to be filed. We find limited evidence of a market response to 8-K filings, suggesting other more timely sources of information. Our evidence provides support for SEC proposals to accelerate filing periods for all 8-K events.

Carter, M.E. and G. Manzon, Jr. “Evidence on the Role of Taxes on Financing Choices:  Consideration of Mandatorily Redeemable Preferred Stock”, Journal of Financial Research, Spring 1995: 103-114.

Debt and mandatorily redeemable preferred stock are similar in cash flows and in holders’ claims. However, they differ significantly in tax treatment, allowing firms that cannot make full use of debt tax shields to finance more efficiently with MRPS.  Our findings support this contention; firms with low marginal tax rates rely more heavily on MRPS than debt.