Executive Bonus Plans and Accounting Trade-offs: The Case of the Oil and Gas Industry, 1985-86

Oil and gas firms using the full cost method during 1985-1986 faced a choice between taking a write-down in oil and gas properties or changing to the successful efforts method. In a time-series analysis, the executive bonuses of firms switching to the successful efforts method are found to be associated with account ing income, suggesting the effects of bonus plans on the switch decision. We also show that the firms choosing write-down reported more losses before the write-down during the decision year, and that the bonuses of these firms' executives are not affected by the write-down.