Stock Option Compensation and Earnings Management Incentives

Abstract

We examine whether the structure of executive compensation, specifically stock options relative to other forms of pay, is associated with opportunistic use of discretionary accruals in reported earnings. Prior research suggests that using options creates an incentive to temporarily depress the firm's stock price prior to the option award date, thereby lowering the exercise price of the options. We hypothesize, and find evidence, that relatively high option compensation is associated with income-decreasing discretionary accrual choices in periods leading up to option award dates. Furthermore, we find that this association is stronger when managers are able to publicly announce earnings prior to the option award date. Our results are consistent with the general implication from prior research that option compensation creates opportunistic incentives for managers to time the release of good and bad news to the market.

Corporate Governance and Accountability

“…Bergstresser and Philippon (2006), Elayan, Li, and Meyer (2008), and Zhang, Bartol, Smith, Pfarrer, and Khanin (2008) all find a positive correlation between earnings management and high levels of equity compensation. A study by Baker, Collins, and Reitenga (2003) suggests that managers are more likely to engage in earnings management when their total compensation depends heavily on financial performance, as through stock options. Johnson, Ryan, and Tian (2008) report that these effects are most pronounced when compensation consists of vested options or unrestricted stock, when managers would feel the effect of a drop in stock price most acutely.…”

Executive Stock Option Plans: Uji Pengelolaan Laba Selama Vesting Period

“…Dengan demikian penelitian ini berhasil menolak H01. Penelitian ini konsisten dengan studi Chauvin & Shenoy (2000), Baker et al, (2002), dan Balsam et al, (2003). Hasil penelitian menunjukkan bahwa nilai F kalkulasian sebesar 10,839 dengan nilai probabilitas 0,000 secara statistis signifikan pada tingkat 1%.…”

“…Dengan demikian penelitian ini berhasil menolak H01. Penelitian ini konsisten dengan studi Chauvin & Shenoy (2000), Baker et al (2002), dan Balsam et al (2003). Hasil pengujian H2a dan H2b menunjukkan bahwa semakin banyak opsi saham yang ditawarkan pada eksekutif maka manajer semakin termotivasi untuk melakukan pengelolaan laba menaik sesudah penawaran opsi saham.…”

The Earnings Management Motivation: Accrual Accounting vs. Cash Accounting

“…Other studies document the relationship between earnings management and stock compensation through stock options (Baker et al, 2003), (Bartov& Mohanram, 2004), (Kwon &Yin, 2006). (Graham et al, 2005) argued that managers preferred real earnings management to accrual-based earnings management because accrual manipulation was more likely to be scrutinized by external auditors and regulatory bodies while real activities manipulation had a lower chance of being detected.…”