Shareholder Activism and Earnings Management Incentives: An Empirical Examination of Shareholder Proposals in the United States

27 Pages Posted: 10 Sep 2013

See all articles by Yan Sun

Yan Sun

Saint Louis University - Department of Accounting

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: September 2013

Abstract

In this article, 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 (DA) in their reported earnings. In addition, we find that the likelihood of meeting or beating earnings benchmarks through the use of DA 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.

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 United States (September 2013). Journal of International Financial Management & Accounting, Vol. 24, Issue 3, pp. 234-260, 2013. Available at SSRN: https://ssrn.com/abstract=2323093 or http://dx.doi.org/10.1111/jifm.12010

Yan Sun (Contact Author)

Saint Louis University - Department of Accounting ( email )

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

Weimin Wang

Saint Louis University ( email )

63103

Xu (Frank) Wang

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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