56. LO.5, LO.7 & LO.9 (Performance evaluation; compensation; ethics; writing) A recent survey…
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56. LO.5, LO.7 & LO.9 (Performance evaluation; compensation; ethics; writing) A recent survey of U.S. chief financial officers provides compelling evidence that manag- ers are willing to take extraordinary measures to achieve financial earnings targets. For example, the survey found 26 percent were willing to sacrifice some long-term value of the firm to achieve short-term earnings goals. Further, 55 percent were willing to delay the start of new projects to achieve higher earnings and 80 percent indicated they would reduce spending on research and development to achieve short-term earnings targets.
Source: J. R. Graham, C. R. Harvey, and S. Rajgopal, “The Economic Implications of Corporate Financial Reporting,” Journal of Accounting and Economics 40 (2005), pp. 3–73.
a. Discuss the ethics of managers forfeiting long-term value of their firms to achieve short-term earnings goals and earn higher short-term compensation.
b. How can boards of directors create incentives and performance measures that will discourage top managers from optimizing reported short-run performance at the expense of long-term performance?
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