Earnings Management Prior to Stock Option Grants

20 Pages Posted: 21 May 2003

See all articles by Steven Balsam

Steven Balsam

Temple University - Department of Accounting

Lucy Huajing Chen

Villanova University

Srinivasan Sankaraguruswamy

National University of Singapore (NUS) - Department of Accounting

Date Written: January 2003

Abstract

This paper examines earnings management prior to stock option grants. Because the gain realized from a stock option is dependent on the difference between the exercise price determined on the stock option grant date and market price on the exercise date, management has the incentive to temporarily depress its share price immediately prior to the grant date (Yermack, 1997; Chauvin and Shenoy, 2001). This paper focuses on earnings management to decrease the exercise price prior to the stock option grants. Our results support this hypothesis, as we find a negative relation between discretionary accruals and subsequent stock option grants.

Keywords: earnings management, discretionary accruals, stock option grants

JEL Classification: M41, M43, J33

Suggested Citation

Balsam, Steven and Chen, Lucy Huajing and Sankaraguruswamy, Srinivasan, Earnings Management Prior to Stock Option Grants (January 2003). Available at SSRN: https://ssrn.com/abstract=378440 or http://dx.doi.org/10.2139/ssrn.378440

Steven Balsam (Contact Author)

Temple University - Department of Accounting ( email )

306 Speakman Hall
Philadelphia, PA 19122
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215-204-5587 (Fax)

HOME PAGE: http://www.sbm.temple.edu/~drb/

Lucy Huajing Chen

Villanova University ( email )

United States
610-519-6321 (Phone)

Srinivasan Sankaraguruswamy

National University of Singapore (NUS) - Department of Accounting ( email )

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Singapore, 117592
Singapore
+65 6874 4473 (Phone)
+65 6779 2083 (Fax)

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