CSR-Contingent Executive Compensation Incentive and Earnings Management

Sustainability 2019, 11(12), 3421

12 Pages Posted: 26 Jun 2019 Last revised: 25 Sep 2019

See all articles by Zhichuan Frank Li

Zhichuan Frank Li

University of Western Ontario - Ivey School of Business

Caleb Thibodeau

affiliation not provided to SSRN

Date Written: June 22, 2019

Abstract

This paper empirically studies the connection between earnings management and corporate social performance, conditional on the existence of CSR-contingent executive compensation contracts, an emerging practice to link executive compensation to corporate social performance. We find that executives are more likely to manipulate earnings to achieve their personal compensation goals when CSR rating is low, as well as their CSR-contingent compensation. Because of public pressure on their excessive total compensation, corporate executives see no need to manipulate earnings to increase compensation when their CSR-contingent compensation is already high. Our results suggest that earnings management and CSR-contingent compensation are substitute tools to serve the interests of executives, which is an agency problem that was never previously studied. Additionally, we explore how managerial characteristics affect earnings management, driven by the incentive effects of CSR-linked compensation.

Keywords: earnings management, corporate social responsibility, CSR-contingent compensation, CSR contract, executive compensation, discretionary accruals

Suggested Citation

Li, Zhichuan Frank and Thibodeau, Caleb, CSR-Contingent Executive Compensation Incentive and Earnings Management (June 22, 2019). Sustainability 2019, 11(12), 3421. Available at SSRN: https://ssrn.com/abstract=3408270

Zhichuan Frank Li (Contact Author)

University of Western Ontario - Ivey School of Business ( email )

1151 Richmond Street North
London Ontario, Ontario N6A 3K7
Canada

Caleb Thibodeau

affiliation not provided to SSRN

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