Does Equity Compensation Cause Firms to Manage EPS? Evidence from a Regression Discontinuity

74 Pages Posted: 29 Nov 2017 Last revised: 1 Apr 2019

See all articles by Xing Gao

Xing Gao

University of Illinois at Urbana-Champaign

Mathias Kronlund

University of Illinois at Urbana-Champaign

Date Written: March 30, 2019

Abstract

Equity-based compensation causes increases in firms' share count and depresses Earnings Per Share (EPS), which can give firms an incentive to raise EPS through repurchases or earnings management. This paper documents a causal relationship between equity-based pay and EPS management. Employing a regression discontinuity framework, we compare firms with "just-in-the-money" option exercises to firms with options that narrowly end up out-of-the-money. We find that firms engage in real- and accruals-based earnings management, but not repurchases, to boost EPS around these plausibly exogenous exercises. These effects are stronger when the increase in shares is larger, and apply only when earnings are positive.

Keywords: executive compensation, EPS, option exercises, regression discontinuity, share repurchases, dilution, earnings management

JEL Classification: G30, G35

Suggested Citation

Gao, Xing and Kronlund, Mathias, Does Equity Compensation Cause Firms to Manage EPS? Evidence from a Regression Discontinuity (March 30, 2019). Available at SSRN: https://ssrn.com/abstract=3073822 or http://dx.doi.org/10.2139/ssrn.3073822

Xing Gao

University of Illinois at Urbana-Champaign ( email )

601 E John St
Champaign, IL 61820
United States

Mathias Kronlund (Contact Author)

University of Illinois at Urbana-Champaign ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
101
rank
257,732
Abstract Views
697
PlumX Metrics