An Empirical Analysis of the Effects of Monitoring Intensity on the Relation between Equity Incentives and Earnings Management

46 Pages Posted: 3 Jan 2013 Last revised: 1 May 2013

See all articles by Scott Duellman

Scott Duellman

Saint Louis University - Department of Accounting

Anwer S. Ahmed

Texas A&M University - Mays Business School

Ahmed M. Abdel-Meguid

The American University in Cairo - School of Business

Date Written: October 1, 2012

Abstract

Prior studies suggest that equity incentives inherently have both an interest alignment effect and an opportunistic financial reporting effect. Using three distinct proxies for earnings management we find evidence consistent with the incentive alignment (opportunistic financial reporting) effect of equity incentives increasing as monitoring intensity increases (decreases). Furthermore, using the accrual-based earnings management and meet/beat analyst forecast models we find that the opportunistic financial reporting effect of equity incentives dominates the incentive alignments effect for firms with low monitoring intensity. Using proxies for real earnings management, we find that the incentive alignment effect dominates the opportunistic financial reporting effect for high and moderate monitoring intensity firms. However, for low monitoring intensity firms the opportunistic reporting effect mitigates, but does not completely offset, the benefits of the incentive alignment effect. Overall, these findings are consistent with the level of monitoring affecting the relation between equity incentives and earnings management.

Keywords: equity incentives, earnings management, corporate governance, monitoring

JEL Classification: G32, M41

Suggested Citation

Duellman, Scott and Ahmed, Anwer S. and Abdel-Meguid, Ahmed M., An Empirical Analysis of the Effects of Monitoring Intensity on the Relation between Equity Incentives and Earnings Management (October 1, 2012). Journal of Accounting and Public Policy, Forthcoming; Mays Business School Research Paper No. 2013-1. Available at SSRN: https://ssrn.com/abstract=2195677 or http://dx.doi.org/10.2139/ssrn.2195677

Scott Duellman (Contact Author)

Saint Louis University - Department of Accounting ( email )

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

Anwer S. Ahmed

Texas A&M University - Mays Business School ( email )

430 Wehner
College Station, TX 77843-4353
United States

Ahmed M. Abdel-Meguid

The American University in Cairo - School of Business ( email )

The American University in Cairo (AUC)
School of Business
New Cairo, 11835
Egypt

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