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The asymmetric relation between earnings management behaviors: evidence from executive compensation incentives

Author

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  • Pei-I Chou

    (National Open University)

  • Chia-Hao Lee

    (National Taichung University of Science and Technology)

Abstract

The purpose of this paper is to examine whether executive stock-based compensation incentives induce the relation between accrual-based earnings management (AEM) and real earnings management (REM) to become asymmetric. The empirical results show that there is the substitute relation between AEM and REM when CEOs have the lowest degree of stock-based compensation incentives. However, there is the complementary relation between AEM and REM when CEOs have the median degree of stock-based compensation incentives. Moreover, the results also present a trade-off relation exists in the highest degree financial incentives during the post-SOX period, but this relation does not exist in the same regime during the pre-SOX period. These findings provide new insight into executive compensation mechanism for shareholders, investors, and regulators, resulting in the efficiency to prevent managers from obtaining private gains at shareholders’ expense.

Suggested Citation

  • Pei-I Chou & Chia-Hao Lee, 2018. "The asymmetric relation between earnings management behaviors: evidence from executive compensation incentives," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 42(4), pages 765-778, October.
    • Handle: RePEc:spr:jecfin:v:42:y:2018:i:4:d:10.1007_s12197-018-9426-1
    DOI: 10.1007/s12197-018-9426-1
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    Cited by:

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    More about this item

    Keywords

    Earnings management; Executive stock-based compensation incentives; Panel threshold model;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C24 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Truncated and Censored Models; Switching Regression Models; Threshold Regression Models

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