Curbing Earnings Management: Experimental Evidence on How Clawback Provisions and Board Monitoring Affect Managers’ Use of Discretion

37 Pages Posted: 27 Mar 2018

See all articles by Jeffrey Hales

Jeffrey Hales

University of Texas at Austin - Department of Accounting

Balaji Koka

Rice University

Shankar Venkataraman

Bentley University - McCallum Graduate School of Business

Date Written: March 25, 2018

Abstract

We examine how clawback provisions and board monitoring affect managers’ use of discretion to achieve earnings targets. Using an experiment, we find that when board monitoring is weak, imposing clawback provisions has little impact on the total amount of earnings management activity. This null result arises because, while clawbacks do curb the extent to which managers make accrual estimates in line with their own preferences (accrual earnings management), these provisions also increase managers’ use of discretion when making operational decisions (real earnings management). In contrast, strong board monitoring results in less of both types of earnings management. Our results have important policy implications by demonstrating that, because of the ability to substitute accrual earnings management with real earnings management, mandated clawbacks (in the absence of strong board monitoring) alter how managers use their discretion, whereas strong board monitoring alters how much discretion managers are willing to use.

Keywords: earnings management, clawback provisions, corporate governance, board of directors

JEL Classification: M41, M48, G38

Suggested Citation

Hales, Jeffrey and Koka, Balaji and Venkataraman, Shankar, Curbing Earnings Management: Experimental Evidence on How Clawback Provisions and Board Monitoring Affect Managers’ Use of Discretion (March 25, 2018). Georgia Tech Scheller College of Business Research Paper No. 18-7, Available at SSRN: https://ssrn.com/abstract=3149122 or http://dx.doi.org/10.2139/ssrn.3149122

Jeffrey Hales

University of Texas at Austin - Department of Accounting ( email )

Austin, TX 78712
United States
512-471-2163 (Phone)
512-471-3907 (Fax)

Balaji Koka

Rice University ( email )

Houston, TX
United States

Shankar Venkataraman (Contact Author)

Bentley University - McCallum Graduate School of Business ( email )

Waltham, MA 02452-4705
United States

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