Executive Equity Incentives and Opportunistic Manager Behavior: New Evidence from a Quasi-Natural Experiment

Review of Accounting Studies, forthcoming

71 Pages Posted: 9 Nov 2016 Last revised: 29 Jan 2021

Date Written: February 10, 2017

Abstract

This study provides plausible causal evidence on the effect of executive equity incentives on opportunistic manager behavior. I exploit a unique setting created by the introduction of Financial Accounting Standard (FAS) 123R in 2005, which led to an exogenous increase in the cost of option pay, causing a substantial decline in option pay for some firms while leaving others largely unaffected. Using difference-in-differences analyses with a treatment group of firms that show a decline in option pay and two control groups, I find that the likelihood of a treatment firm meeting or beating analyst forecasts decreases by 14 to 20 percent. The results show that the relatively high levels of meet-or-beat before FAS 123R were largely driven by real activities manipulation such as abnormal asset sales and sales manipulation to beat analysts’ benchmarks, while accrual manipulation and analyst management are less relevant. Together, the results suggest that equity incentives encourage opportunistic actions to meet or beat earnings expectations, and a decline in option pay resulted in a decline in earnings management to meet earnings expectations.

Keywords: executive compensation, target beating, earnings management, FAS 123R, quasi-natural experiment

JEL Classification: M41, G38

Suggested Citation

Nienhaus, Martin, Executive Equity Incentives and Opportunistic Manager Behavior: New Evidence from a Quasi-Natural Experiment (February 10, 2017). Review of Accounting Studies, forthcoming, Available at SSRN: https://ssrn.com/abstract=2866337 or http://dx.doi.org/10.2139/ssrn.2866337

Martin Nienhaus (Contact Author)

Goethe University Frankfurt ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

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