The Effect of Shareholder-Initiated Corporate Governance on Accrual-Based and Real Earnings Management

Ng, Jeffrey; Wu, Hong; Zhai, Sophia Weihuan; Zhao, Jing

doi:10.2139/ssrn.3002464

Cited by 1 publication

(1 citation statement)

References 61 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…More recent research tends to focus on the association between executives’ equity compensation incentives and earnings management, likely due to the prevalence of executive equity compensation in the US labor market. Some research provides evidence of a link between executive equity compensation and earnings management (e.g., Armstrong et al., ; Bergstresser & Philippon, ; Burns & Kedia, ; Cheng & Warfield, ; Cornett et al., ; Efendi et al., ; Feng, Ge, Luo, & Shevlin, ; Harris & Bromiley, ; Jayaraman & Milbourn, ; Jiang, Petroni, & Wang, ; Johnson, Ryan, & Tian, ; Larcker, Richardson, & Tuna, ; Murphy, ; Ng, Wu, Zhao, & Zhai, ; Oberholzer‐Gee & Wulf, ; O'Connor, Priem, Coombs, & Gilley, ), while other research does not (e.g., Armstrong, Jagolinzer, & Larcker, ; Baber, Kang, Liang, & Zhu, ; Erickson, Hanlon, & Maydew, ; Larcker et al., ).…”

Section: Hypothesis Development and Related Researchmentioning

confidence: 99%

Rank and file equity compensation and earnings management: Evidence from stock options

Holderness

Huffman²,

Lewis-Western

2019

Business Fin & Account

View full text Add to dashboard Cite

The widespread use of rank and file equity-based compensation suggests that executives believe that rank and file employees can affect firm outcomes, and some research supports this view. If equity-based incentives influence rank and file employees' productive efforts, they might also influence their earnings management decisions.We find that increases in rank and file employees' option-based compensation-our proxy for equity-based compensation-are associated with increases in earnings management and that this relation is attributable to real activities (as opposed to accrual) earnings management. Cross-sectional tests indicate that the relation is stronger when rank and file option compensation is likely to generate greater performance incentives and attenuated in the presence of more intense monitoring. Finally, we explore the role of cash constraints and overvaluation as potential alternative explanations for this relation and find that neither accounts for our results. K E Y W O R D Saccrual-based earnings management, earnings management, earnings quality, equity compensation, equity incentives, financial reporting quality, fraud, rank and file employees, real earnings management, stock options

show abstract