Meeting or Missing Earnings Benchmarks: The Role of CEO Integrity

43 Pages Posted: 30 Sep 2012

See all articles by Yuping Jia

Yuping Jia

Frankfurt School of Finance & Management - Accounting Department

Date Written: August 2012

Abstract

This paper examines the role of CEO integrity in determining whether a company’s earnings benchmarks will be met, beaten or missed. Prior literature has provided evidence that managers have incentives for meeting or beating earnings benchmarks and are rewarded by the market for doing so (Lopez and Rees 2002; Skinner and Sloan 2002). Managers also have incentives to miss their earnings targets for the benefit of a lower strike price on subsequent option grants (McAnally et al. 2008). A CEO’s involvement in backdating is taken here as a measure of his/her integrity. This paper shows that CEO integrity significantly influences benchmark meeting/beating behavior. In other words, backdating CEOs are more likely to meet or narrowly beat all three earnings benchmarks examined in the paper: positive earnings, last year’s earnings and analysts’ forecasts. At the same time, they are also less likely to just miss a zero earnings benchmark. The results presented in this paper further validate the use of benchmark meeting/beating as a measure of earnings manipulation.

Keywords: earnings benchmark, earnings management, CEO integrity, option

JEL Classification: M41, M52

Suggested Citation

Jia, Yuping, Meeting or Missing Earnings Benchmarks: The Role of CEO Integrity (August 2012). Available at SSRN: https://ssrn.com/abstract=2154169 or http://dx.doi.org/10.2139/ssrn.2154169

Yuping Jia (Contact Author)

Frankfurt School of Finance & Management - Accounting Department ( email )

Sonnemannstraße 9-11
Frankfurt
Germany
0049 69 154008 839 (Phone)

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