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CEO Compensation and Fair Value Accounting: Evidence from Purchase Price Allocation


  • Accepted by Douglas Skinner. We gratefully acknowledge helpful comments and suggestions from an anonymous reviewer, Clara Chen, Daniel Cohen, Zhaoyang Gu, Steve Matsunaga, K. Ramesh, Pervin Shroff, Jerry Zimmerman, and seminar participants at CUNY Baruch College, Singapore Management University, Washington University in St Louis, and the 2010 CAPANA conference. We also thank Sophie Liu, Ashley Reimers, Fang Wan, Qiong Wu, Yidan Xu, and Junqi Zou for their research assistance. All errors are our own.


This study investigates the impact of CEO compensation structure on post-acquisition purchase price allocation, an accounting procedure that involves fair value estimation of various assets and liabilities. We find that CEOs whose compensation packages rely more on earnings-based bonuses are more likely to overallocate the purchase price to goodwill, the largest asset recorded post-acquisition. Because goodwill is not amortized, the overallocation likely increases post-acquisition earnings and bonuses. We also find that, when the acquirer's CEO bonus plan includes performance measures that are not affected, or are less affected, by the overstatement of goodwill, such as cash flows, sales, or earnings growth, the overallocation to goodwill motivated by bonus plans diminishes.