CEO compensation and fair value accounting: Evidence from purchase price allocation

This study investigates the impact of CEO compensation structure on post-acquisition fair value measurement for acquired entities, a unique event where managers estimate and disclose fair values of various non-financial assets and liabilities. We find that the relative importance of bonuses in a CEO's pay package is an important determinant of the proportion of purchase price allocated to goodwill, which in turn affects subsequent reported earnings and therefore managers' bonuses. Further, we find that the use of different accounting-based performance measures for bonus compensation affects managerial accounting choices in the allocation process. When acquirer's CEO bonus plan includes performance measures that are not affected or less affected by the overstatement of goodwill, such as cash flows, earnings growth, or sales, the over-allocation to goodwill motivated by bonus plans diminishes.