CEO Risk-Related Incentives and Income Smoothing

61 Pages Posted: 26 Mar 2007 Last revised: 18 Apr 2009

See all articles by Julia Grant

Julia Grant

Case Western Reserve University - Department of Accountancy

Antonio Parbonetti

University of Padua

Garen Markarian

HEC - University of Lausanne

Date Written: March 2, 2009

Abstract

We investigate whether risk-related incentives of executive stock option (ESO) compensation plans are associated with income smoothing. Given that risk has both potential benefits and costs, including possible losses and/or large fluctuations that affect reported financial outcomes, flexibilities in financial reporting enable a manager to make apparent risk lower while masking the underlying real risk. As such, income smoothing can be a means by which a manager can reduce the unintended consequences of risk taking without at the same time reducing its intended consequences. Using a sample of approximately 7,000 firm-years, we find that risk-taking incentives and income smoothing are positively related. Our results are robust to alternate specifications of income smoothing and risk-taking, and to various firm-level characteristics, including governance structures, CEO share and option holdings. Additionally, we find that our results are especially pronounced in firms whose risk and risk-taking behavior are high.

Keywords: income smoothing, earnings management, CEO risk incentives, compensation risk, CEO compensation structure

JEL Classification: M41, M43, G34, G30, G32, J33

Suggested Citation

Grant, Julia and Parbonetti, Antonio and Markarian, Garen, CEO Risk-Related Incentives and Income Smoothing (March 2, 2009). AAA 2009 Financial Accounting and Reporting Section (FARS) Paper, Available at SSRN: https://ssrn.com/abstract=1106096 or http://dx.doi.org/10.2139/ssrn.1106096

Julia Grant

Case Western Reserve University - Department of Accountancy ( email )

Cleveland, OH 44106-7235
United States
216-368-4158 (Phone)
216-368-4776 (Fax)

Antonio Parbonetti

University of Padua ( email )

Via del Santo 33
Padova, 35123
Italy
+39 049 8274261 (Phone)

Garen Markarian (Contact Author)

HEC - University of Lausanne ( email )

UNIL Dorigny
Lausanne, Lausanne 1015
Switzerland

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
1,113
Abstract Views
4,251
rank
20,794
PlumX Metrics