Incentives, Opportunities, and Earnings Management Using Tax Expense

56 Pages Posted: 7 Jul 2018 Last revised: 22 May 2019

See all articles by Erik Beardsley

Erik Beardsley

University of Notre Dame - Mendoza College of Business

Mehmet Kara

Texas A&M University - Department of Accounting

Connie D. Weaver

Texas A&M University - Department of Accounting

Date Written: May 20, 2019

Abstract

Prior studies that examine the effect of managerial incentives on investment or misreporting decisions typically hold firm characteristics constant and focus on a particular managerial incentive. However, managers’ responses to different types of incentives likely depend on firm characteristics that create opportunities to respond to those incentives. Using year-end tax expense manipulations as our setting, we examine the extent to which equity incentives, firm characteristics that create opportunities, and their interaction are associated with the decision to manage earnings. We show that stock price incentives (portfolio delta), risk-taking incentives (portfolio vega), and firm characteristics that create opportunities are associated with a greater propensity for firms to manage earnings using tax expense. Importantly, we find that portfolio delta has a greater effect on the earnings management decision when firm opportunities are higher, while we do not find evidence that the effect of portfolio vega varies with firm opportunities. Collectively, our results suggest that managers respond to stock price and risk-taking incentives differently depending on their opportunity sets.

Keywords: tax expense, executive compensation, earnings management, market response

JEL Classification: H25, J33, M40, M41, M43

Suggested Citation

Beardsley, Erik and Kara, Mehmet and Weaver, Connie D., Incentives, Opportunities, and Earnings Management Using Tax Expense (May 20, 2019). Available at SSRN: https://ssrn.com/abstract=3198771 or http://dx.doi.org/10.2139/ssrn.3198771

Erik Beardsley (Contact Author)

University of Notre Dame - Mendoza College of Business ( email )

Mendoza College of Business
Notre Dame, IN 46556-5646
United States

Mehmet Kara

Texas A&M University - Department of Accounting ( email )

430 Wehner
College Station, TX 77843-4353
United States

Connie D. Weaver

Texas A&M University - Department of Accounting ( email )

430 Wehner
College Station, TX 77843-4353
United States

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