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Evidence on factors affecting the relationship between CEO stock option compensation and earnings management

Author

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  • Gary K. Meek
  • Ramesh P. Rao
  • Christopher J. Skousen

Abstract

Purpose - The purpose of this paper is to examine the factors affecting the relationships between CEO stock option compensation and earnings management.Design/methodology/approach– Regression of CEO stock option compensation and other factors on measures of discretionary accruals.Findings– A positive relationship between CEO stock option compensation and discretionary accruals was found, implying that earnings management is more likely where stock options are a larger part of CEO compensation. Earnings management is found to be moderated in large firms with stock option compensation and the relationship between stock options and earnings management has intensified in recent years. It was also found that stock options exacerbate earnings management in firms with growth opportunities.Research limitations/implications– Beyond the scope of this paper, these findings raise the following questions: What does the evidence of a size effect mean? Does it reflect information asymmetry, governance, external monitoring, or political risk? Why has the stock option effect on earnings management become more pronounced in recent years? Is it possible to mitigate the negative effects of option compensation on earnings management through the presence of stronger governance structures? Is it possible to mitigate the negative effects of option compensation on earnings management through the presence stronger governance structures? There are implications for compensation policies for corporate executives.Originality/value– This paper extends prior research on the relationship between CEO stock option compensation and earnings management. It provides new insight into the factors affecting this relationship.

Suggested Citation

  • Gary K. Meek & Ramesh P. Rao & Christopher J. Skousen, 2007. "Evidence on factors affecting the relationship between CEO stock option compensation and earnings management," Review of Accounting and Finance, Emerald Group Publishing Limited, vol. 6(3), pages 304-323, August.
    • Handle: RePEc:eme:rafpps:v:6:y:2007:i:3:p:304-323
    DOI: 10.1108/14757700710778036
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    Citations

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    Cited by:

    1. Raghavan J. Iyengar & Judy Land & Ernest M. Zampelli, 2010. "Does board governance improve the quality of accounting earnings?," Accounting Research Journal, Emerald Group Publishing Limited, vol. 23(1), pages 49-68, July.
    2. Muhammad Sadiq & Shafi Mohamad & Wing Chong Garrett Kwong, 2019. "Do CEO Incentives Mediate the Relationship between Political Influences and Financial Reporting Quality?," International Journal of Asian Social Science, Asian Economic and Social Society, vol. 9(3), pages 276-284, March.
    3. Ndebugri, Haruna & Tweneboah Senzu, Emmanuel, 2017. "Analyzing the critical effects of creative accounting practices in the corporate sector of Ghana," MPRA Paper 81113, University Library of Munich, Germany, revised 04 Sep 2017.
    4. Jia, Y., 2008. "Essays on the role of managerial type in financial reporting," Other publications TiSEM ab1af530-b40f-4c86-9edd-b, Tilburg University, School of Economics and Management.
    5. Junying Chen & Haoyu Zeng & Fei Yang, 2016. "Parameter estimation for employee stock ownerships preference experimental design," Journal of Applied Statistics, Taylor & Francis Journals, vol. 43(8), pages 1525-1540, June.
    6. Maria Kontesa & Rayenda Brahmana & Ashley Hui Hui Tong, 2021. "Narcissistic CEOs and their earnings management," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 25(1), pages 223-249, March.
    7. Baolei Qi & Rong Yang & Gaoliang Tian, 2014. "Can media deter management from manipulating earnings? Evidence from China," Review of Quantitative Finance and Accounting, Springer, vol. 42(3), pages 571-597, April.
    8. Mehdi Bouras & Mohamed Imen Gallali, 2017. "Earnings Management, Equity-based Compensation, Economic Conjuncture and Governance Mechanisms: A Comparative Study between France and the United States," International Journal of Economics and Financial Issues, Econjournals, vol. 7(2), pages 585-600.
    9. Emilia Vähämaa, 2014. "Executive Turnover, Gender, And Earnings Management: An Exploratory Analysis," Accounting Perspectives, John Wiley & Sons, vol. 13(2), pages 103-122, June.
    10. Mehdi Nekhili & Fahim Javed & Haithem Nagati, 2022. "Audit Partner Gender, Leadership and Ethics: The Case of Earnings Management," Journal of Business Ethics, Springer, vol. 177(2), pages 233-260, May.
    11. Kanyarat (Lek) Sanoran, 2022. "Lessening Effects of SOX on the Relationship between Executive Compensation Components and Cost of Equity Capital," IJFS, MDPI, vol. 10(3), pages 1-12, July.
    12. Hadley, Brandy, 2019. "Executive compensation and political sensitivity: Evidence from government contractors," Journal of Corporate Finance, Elsevier, vol. 59(C), pages 276-301.
    13. Ei Yet Chu & Saw Imm Song, 2012. "Executive Compensation, Earnings Management and Over Investment in Malaysia," Asian Academy of Management Journal of Accounting and Finance (AAMJAF), Penerbit Universiti Sains Malaysia, vol. 8(Supp. 1), pages 13-37.
    14. Katarina Valaskova & Peter Adamko & Katarina Frajtova Michalikova & Jaroslav Macek, 2021. "Quo Vadis, earnings management? Analysis of manipulation determinants in Central European environment," Oeconomia Copernicana, Institute of Economic Research, vol. 12(3), pages 631-669, September.
    15. Ines Kahloul & Jocelyn Grira & Khawla Hlel, 2023. "The trilogy of economic policy uncertainty, earnings management and firm performance: empirical evidence from France," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 47(1), pages 184-206, March.
    16. Fizza Tassadaq & Qaisar Ali Malik, 2015. "Creative Accounting and Financial Reporting: Model Development and Empirical Testing," International Journal of Economics and Financial Issues, Econjournals, vol. 5(2), pages 544-551.
    17. Luis Porcuna Enguix, 2021. "The New EU Remuneration Policy as Good but Not Desired Corporate Governance Mechanism and the Role of CSR Disclosing," Sustainability, MDPI, vol. 13(10), pages 1-35, May.
    18. Guy D. Fernando & Qiao Xu, 2012. "CEO compensation and strategic expenses: penalizing, shielding or rewarding?," Review of Accounting and Finance, Emerald Group Publishing Limited, vol. 11(3), pages 279-297, August.

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