Equity Incentives and Earnings Management: Evidence from the Banking Industry

Abstract

We examine the relationship between equity incentives and earnings management in the banking industry. By focusing on this regulated industry and using industry-specific earnings management proxies, we provide evidence on the impact of regulation on earnings management arising from CEOs' equity incentives. We find that bank managers with high equity incentives are more likely to manage earnings, but only when capital ratios are closer to the minimum regulatory capital requirements. This finding indicates that in the banking industry, potential regulatory intervention induces, rather than mitigates, earnings management arising from equity incentives.

Keywords: equity incentives, earnings management, the banking industry

JEL Classification: M41, M43, G21, G34, J33