We empirically examine standard agency predictions about how performance measures are optimally weighted to provide CEO incentives. Consistent with prior empirical research, we document that the relative weight on price and non-price performance measures in CEO cash pay is a decreasing function of the relative variances. Agency theory speaks to the weights in total compensation (annual total pay and changes in the CEO's equity portfolio value), however, and we document that very little of CEOs' total incentives come from cash pay. We also document that variation in the relative weight on price and non-price performance measures in CEO total compensation is an increasing function of the relative variances. The conflicting results using total compensation indicate that existing findings on cash pay cannot be interpreted as evidence supporting standard agency predictions. Based on our results, we suggest approaches for future research on performance measure use in CEO total compensation.

The accuracy of sell-side analysts' forecast revisions is related to a number of factors, including characteristics of the analyst and the age of the forecast. In this study we examine whether there are differences in how sophisticated and unsophisticated investors use these factors to predict the relative accuracy of forecast revisions. We adapt the lens model methodological approach from the judgment and decision-making literature to investigate these differences in an archival setting. Our results suggest that sophisticated investors have greater knowledge overall about the relation of the factors to forecast accuracy. Further, our evidence is consistent with sophisticated investors relying more on the specific factors that provide the most benefits (relative to their costs) for predicting relative forecast accuracy.

Previous research demonstrates that auditors' directional goals influence their reporting decisions. For example, when auditors have goals of accepting client-preferred accounting methods, they tend to exploit ambiguity in reporting standards to justify those methods, even when they are aggressive (Hackenbrack and Nelson 1996). We report an experimental investigation of the likely effectiveness of regulation designed to curb this tendency. Specifically, regulators suggest that having auditors identify benchmarks or assess the quality of various methods will “raise the bar” for method acceptability, thereby reducing auditor acceptance of aggressive reporting methods. However, this reasoning ignores the fact that ambiguity typically surrounds quality assessment. Following motivated reasoning theory, we argue that, in order to meet the increased standard for acceptability, auditors with high commitment to directional goals will exploit the ambiguity surrounding the quality of various methods when making quality assessments, with the result that the client-preferred method will be deemed best, or at least of high enough relative quality to be used. This theory suggests that auditor acceptance will increase with goal commitment, and that the increase will be most dramatic when quality assessment is performed. Results of our experiment support our hypotheses that performing a quality assessment amplifies the effects of auditors' directional goals on their acceptance of client-preferred methods and on their ratings of the quality of that method. Moreover, auditors making quality assessments are more likely to identify the client's method as the most appropriate method when they are more committed to their directional goals. An implication of our theory and results is that regulation (such as SAS No. 90) that requires auditors to make quality assessments may decrease auditors' objectivity when auditors have directional goals to accept client methods.