The Impact of CEO Career Concerns on Accruals Based and Real Earnings Management

50 Pages Posted: 3 Mar 2010

See all articles by Elizabeth A. Demers

Elizabeth A. Demers

University of Lausanne - Department of Accounting and Control

Chong Wang

Naval Postgraduate School - Graduate School of Business and Public Policy

Multiple version iconThere are 3 versions of this paper

Date Written: March 2, 2010

Abstract

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.

Keywords: Earnings Management, Career Concerns, Discretionary Accruals, Real Activities Management

JEL Classification: M40, M41

Suggested Citation

Demers, Elizabeth A. and Wang, Chong, The Impact of CEO Career Concerns on Accruals Based and Real Earnings Management (March 2, 2010). INSEAD Working Paper No. 2010/13/AC. Available at SSRN: https://ssrn.com/abstract=1562428 or http://dx.doi.org/10.2139/ssrn.1562428

Elizabeth A. Demers (Contact Author)

University of Lausanne - Department of Accounting and Control ( email )

UNIL-Dorigny
Anthropole
Lausanne, 1015
Switzerland

Chong Wang

Naval Postgraduate School - Graduate School of Business and Public Policy ( email )

555 Dyer Road
Monterey, CA 93943
United States

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