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APPLIED ACCOUNTING - PRACTITIONER eJOURNAL"The Impact of CEO Career Concerns on Accruals Based and Real Earnings Management"
ELIZABETH A. DEMERS, INSEAD - Accounting and Control Area This paper theoretically and empirically investigates the role of CEO career concerns on accruals based and real activities earnings management. We develop a model of earnings management, rooted in career concerns, that alternatively incorporates the features of the accrual accounting performance measurement system and the negative value-destroying effects of real activities earnings management choices. Our model leads to the surprising prediction that, absent explicit compensation contracts, managers who maximize lifetime compensation in a perfectly competitive labor market would have little incentive to engage in income-increasing accruals manipulation or real activities earnings management in the early stages of their careers. By contrast, mature executives are tapped into managing earnings upward in order to influence their post-retirement labor market value even though the market correctly foresees this type of “signal jamming�. Our empirical results support the hypotheses that younger managers engage in less accruals based and real earnings management than older CEOs, even after controlling for explicit compensation and wealth based incentives, as well as other factors that have been shown to be associated with earnings management. We also find evidence that younger managers choose the “lesser of two evils� by managing accruals rather than opting for value-destroying real activities earnings management choices. | |||||||
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This eJournal distributes working and accepted paper abstracts with a focus on: accounting profession and practice; applied accounting theory; human relations; human resources; ethical behavior; accounting ethics; career related issues in accounting; career advancement; social accounting; education; professional development and examinations; professional credentials and qualifications; accounting reform; responsibilities; leadership; work related issues; professional experience; personal financial planning; accounting and financial literacy; conflict of interests; roundtable discussions; expert panel conference presentation;, advocacy topics; regulatory factors; legislative issues; current and emerging issues in the accounting profession.
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