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Stock-Based Compensation and Earnings Management Behaviors

Author

Listed:
  • Yu-Cheng Chen

    (Department of Finance, National Chung Hsing University, Taichung, Taiwan, R.O.C)

  • Chia-Hao Lee

    (Department of Finance, National Taichung University of Science and Technology, Taichung, Taiwan, R.O.C)

  • Pei-I Chou

    (Department of Business, National Open University, New Taipei City, Taiwan, R.O.C)

Abstract

The purpose of this paper is to investigate whether a CEOs stock-based compensation incentive, that is one of the main corporate governance dimensions, has different impacts on accruals-based earnings management (AEM) and real activities earnings management (REM) which have different economic costs. Empirical results show that CEOs stock-based compensation incentive has a positive impact on AEM but a negative impact on REM, implying stock-based compensation incentive leads executives to use more AEM but less REM. Given that the SOX places additional compensation risk on executives, the stock-based compensation is an incentive to significantly encourage managers for using more AEM during the pre-SOX period and less REM during the post-SOX period. The evidence implies that managers change their risk perceptions for AEM and REM after the enactment of SOX, and then their earnings management behaviors indeed change for avoiding wealth-destroying pitfalls. These results bring a new insight into the ability to prevent managers from increasing personal wealth at shareholders' expense.

Suggested Citation

  • Yu-Cheng Chen & Chia-Hao Lee & Pei-I Chou, 2015. "Stock-Based Compensation and Earnings Management Behaviors," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 18(02), pages 1-33.
    • Handle: RePEc:wsi:rpbfmp:v:18:y:2015:i:02:n:s0219091515500083
    DOI: 10.1142/S0219091515500083
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    More about this item

    Keywords

    Corporate governance; real activities earnings management; executive stock-based compensation incentive; SOX act;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance

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