Lease accounting and CEO compensation: opportunistic maximization of executive compensation with operating leases? A study of U.S. listed airlines.

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School of Business | Master's thesis
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RESEARCH OBJECTIVES In IFRS (International Financial Accounting Standards) and U.S. GAAP (U.S. Generally Accepted Accounting Principles), leases are accounted for as either operating leases or finance leases leading to distinct and materially different effects on financial statements depending on the classification. Some of these effects are related to performance variables such as earnings or operating profit used widely in management compensation contracts. This study examines the relationship between operating lease intensities and levels of management compensation; whether higher relative levels of CEO bonuses have explanatory power over operating lease intensities implying that operating leases may have been historically used in order to maximize management compensation. Literature is reviewed regarding the topics of leasing and management compensation based on which a hypothesis is formed. DATA AND METHODOLOGY A sample of U.S. airlines through years 2008-2018 is examined and an empirical model based on prior literature on determinants of operating leases constructed to test the hypothesis. Data is obtained from Compustat and ExecuComp databases resulting in a sample consisting of 155 observations. The analysis is performed using two OLS linear regression models incorporating different proxies for bonuses: one capturing the ratio of bonuses over total compensation while the other (a dummy variable) taking on a value of 1 if bonuses are paid. Significant theoretical determinants of leases are controlled for. FINDINGS The study fails to find evidence supporting the hypothesis and instead finds that the level of CEO bonuses is negatively associated with operating-lease intensity within the sample. This finding is consistent with more recent research on the topic. Plausible explanations for this negative association within literature are presently scarce; only some speculation exists.
Thesis advisor
Jarva, Henry
operating leases, management compensation, airlines, SFAS 13, USA