An International Analysis of Director Equity Incentives and Earnings Management

Abstract

Using data from 29 countries, I examine how directors’ equity incentives affect earnings management internationally. I find that firms whose directors awarded higher percentage equity-based compensation are associated with greater use of earnings management. Such positive relation between equity incentives and earnings management persists regardless whether a director serves on the audit committee, or whether a director is classified as an independent or inside director. However, this association is reversed at firms with greater board or audit committee independence. Finally, using a matched sample of American Depository Receipts (ADRs) and non-ADRs, I provide evidence that although ADRs exhibit less earnings management relative to non-ADRs, having an ADR does not deter the attempt of directors with high equity incentives to manipulate earnings.

Keywords: governance; boards; compensation; audit; earnings management

JEL Classification: G3; J3; J33; M41; M42; M52