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.
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Notes
The F statistic can be expressed as follows: \( F=\frac{S_0-{S}_1\left(\widehat{\gamma}\right)}{{\widehat{\sigma}}^2} \), where S0 and \( {S}_1\left(\widehat{\gamma}\right) \) are sums of squared errors under null and alternative hypotheses, respectively. However, the asymptotic distribution of F is non-standard, and hence following the bootstrap method proposed by Hansen (1999), we obtain the approximations of the F statistics and then calculate the p-values by repeating 1000 times bootstrap procedure. If the p-value is less than significance levels, the null hypothesis is rejected and implying there is a threshold effect in the regression.
Following the assumption of Bergstresser and Philippon (2006), the “delta” of the options in the CEO’s portfolio is one. That is to say, a dollar increase in the price of a firm’s share translates one-for-one to the value of an option.
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We gratefully acknowledge National Science Council for providing financial support for this project (NSC 102-2410-H-180-001-).
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Chou, PI., Lee, CH. The asymmetric relation between earnings management behaviors: evidence from executive compensation incentives. J Econ Finan 42, 765–778 (2018). https://doi.org/10.1007/s12197-018-9426-1
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DOI: https://doi.org/10.1007/s12197-018-9426-1