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.
Note: Downloadable document is in a foreign language.
Keywords: Incentive compensation schemes, stock-options, principal-agent problem, corporate governance, earnings management, Sarbanes Oxley Act
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