Impact of CEO Compensation on Earnings Management

30 Pages Posted: 7 Jun 2010

Date Written: June 7, 2010

Abstract

Executive compensation is regarded as an internal mechanism to reduce agency problems. A number of researches proved evidence that the use of performance-based pay schemes induces the CEO to manipulate earnings. Using a sample of 253 firms of "fortune 1000" (1994-2005), we examine the effect of the compensation contract design on the earning management behaviour. We show that the use of the discretionary accruals as proxy of earning management is more pronounced at firms where the CEO’s compensation is more closely tied to the equity value. The analysis during the pre- and post- Sarbanes Oxley periods support that the effect of the incentive ratio on earnings management is more pronounced during the first period and it becomes non significant during the second period, indicating that the incentive effect is slowed down by the new conditions imposed by SOX.

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Keywords: Incentive compensation schemes, stock-options, principal-agent problem, corporate governance, earnings management, Sarbanes Oxley Act

Suggested Citation

Fakhfakh, Imen, Impact of CEO Compensation on Earnings Management (June 7, 2010). Available at SSRN: https://ssrn.com/abstract=1621807 or http://dx.doi.org/10.2139/ssrn.1621807

Imen Fakhfakh (Contact Author)

university of tunis ( email )

41, rue de la liberté, cité bouchoucha
Tunis, bardo 2000
Tunisia

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