Shareholder Activism and Earnings Management Incentives: An Empirical Examination of Shareholder Proposals in the U.S.

Journal of International Financial Management & Accounting, Forthcoming

Posted: 18 Jan 2011 Last revised: 1 Sep 2013

See all articles by Yan Sun

Yan Sun

Saint Louis University

Weimin Wang

Saint Louis University

Xu (Frank) Wang

Saint Louis University - Chaifetz School of Business

Sanjian Bill Zhang

California State University Long Beach

Date Written: June 20, 2013

Abstract

In this paper, we investigate the effect of shareholder activism on earnings management. Using a US sample of shareholder pay-for-performance proposals sponsored by institutional investors, we find that when compared to control firms, firms targeted by shareholder proposals have a greater magnitude of discretionary accruals in their reported earnings. In addition, we find that the likelihood of meeting or beating earnings benchmarks through the use of discretionary accruals is higher for targeted firms whose managers have job security concerns due to the firms’ inferior stock performance in the past or have plans to sell company stock. Our results are consistent with the notion that pay-for-performance proposals have unintended consequences by introducing or exacerbating incentives to manage earnings for short-term gains. The results also indicate that, for financial reporting, the short-termism effect may dominate the alignment and/or disciplinary effect of shareholder monitoring.

Keywords: shareholder activism, managerial incentives, earnings management, insider trading

JEL Classification: M4, G1, D8

Suggested Citation

Sun, Yan and Wang, Weimin and Wang, Xu (Frank) and Zhang, Sanjian, Shareholder Activism and Earnings Management Incentives: An Empirical Examination of Shareholder Proposals in the U.S. (June 20, 2013). Journal of International Financial Management & Accounting, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1742164 or http://dx.doi.org/10.2139/ssrn.1742164

Yan Sun

Saint Louis University ( email )

3674 Lindell Blvd
St. Louis, MO 63108-3397
United States

Weimin Wang

Saint Louis University ( email )

63103

Xu (Frank) Wang (Contact Author)

Saint Louis University - Chaifetz School of Business ( email )

3674 Lindell Blvd
St. Louis, MO 63108-3397
United States

Sanjian Zhang

California State University Long Beach ( email )

1250 Bellflower Blvd.
Long Beach, CA 90840
United States

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