Article2015

Stock-Based Compensation and Earnings Management Behaviors

Yu‐Cheng Chen · Chia‐Hao Lee · Pei‐I Chou

19 citations0/0 files storedReview of Pacific Basin Financial Markets and Policies

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Auditing, Earnings Management, Governance Corporate Finance and Governance Corporate Governance and Financial Management

Abstract

The purpose of this paper is to investigate whether a CEOs stock-based compensation incentive, that is one of the main corporate governance dimensions, has different impacts on accruals-based earnings management (AEM) and real activities earnings management (REM) which have different economic costs. Empirical results show that CEOs stock-based compensation incentive has a positive impact on AEM but a negative impact on REM, implying stock-based compensation incentive leads executives to use more AEM but less REM. Given that the SOX places additional compensation risk on executives, the stock-based compensation is an incentive to significantly encourage managers for using more AEM during the pre-SOX period and less REM during the post-SOX period. The evidence implies that managers change their risk perceptions for AEM and REM after the enactment of SOX, and then their earnings management behaviors indeed change for avoiding wealth-destroying pitfalls. These results bring a new insight into the ability to prevent managers from increasing personal wealth at shareholders' expense.

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References

1976Theory of the firm: Managerial behavior, agency costs and ownership structure 1991Earnings Management During Import Relief Investigations 2005The economic implications of corporate financial reporting 2003Earnings Management through Real Activities Manipulation 2012Detecting Earnings Management 1985The effect of bonus schemes on accounting decisions 2008Real and Accrual-Based Earnings Management in the Pre- and Post-Sarbanes-Oxley Periods 1989Efficient Capital Markets, Inefficient Firms: A Model of Myopic Corporate Behavior

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