Earnings Management Around Employee Stock Option Reissues

46 Pages Posted: 10 Aug 2005

See all articles by Jeffrey L. Coles

Jeffrey L. Coles

University of Utah - Department of Finance

Michael G. Hertzel

Arizona State University (ASU) - Finance Department

Swaminathan L. Kalpathy

Texas Christian University - M.J. Neeley School of Business

Abstract

We investigate market behavior in a setting where managerial incentives to manipulate earnings and market price should be apparent ex ante to market participants. We find evidence of abnormally low discretionary accruals in the period following announcements of cancellations of executive stock options up to the time the options are reissued. Nevertheless, analysts and investors are not misled. Discretionary accruals have little power in explaining stock price performance during this period. Moreover, discretionary accruals do not explain subsequent analyst forecast errors. Thus, our findings suggest that, in this transparent setting, analysts and investors do not respond to earnings management.

Keywords: Capital markets, Stock options, Earnings management, Discretionary accruals, Executive compensation

JEL Classification: G14, G30, J33, M43

Suggested Citation

Coles, Jeffrey L. and Hertzel, Michael G. and Kalpathy, Swaminathan L., Earnings Management Around Employee Stock Option Reissues. Journal of Accounting & Economics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=778704

Jeffrey L. Coles

University of Utah - Department of Finance ( email )

David Eccles School of Business
Salt Lake City, UT 84112
United States
801-587-9093 (Phone)

Michael G. Hertzel

Arizona State University (ASU) - Finance Department ( email )

W. P. Carey School of Business
P.O. Box 873906
Tempe, AZ 85287-3906
United States
480-965-6869 (Phone)
602-965-8539 (Fax)

Swaminathan L. Kalpathy (Contact Author)

Texas Christian University - M.J. Neeley School of Business ( email )

Fort Worth, TX 76129
United States

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