Equity Incentives and Earnings Management

By Qiang Cheng, Terry D. Warfield. 2005

1,489 citations recorded by the source corpus.

This paper examines the link between managers' equity incentives—arising from stock‐based compensation and stock ownership—and earnings management. We hypothesize that managers with high equity incentives are more likely to sell shares in the future and this motivates these managers to engage in earnings management to increase the value of the shares to be sold. Using stock‐based compensation and stock ownership data over the 1993–2000 time period, we document that managers with high equity incentives sell more shares in subsequent periods. As expected, we find that managers with high equity incentives are more likely to report earnings that meet or just beat analysts' forecasts. We also find that managers with consistently high equity incentives are less likely to report large positive earnings surprises. This finding is consistent with the wealth of these managers being more sensitive to future stock performance, which leads to increased reserving of current earnings to avoid future earnings disappointm...

Subfields: Accounting, Finance

View Paper: https://www.semanticscholar.org/paper/96e655f1f7302baf61e6eb7c46f3cc7dcdb3a525

How researchers see this paper

The researchers whose trusted networks rank it highest, strongest advocate first. Every researcher gets a different order.

In Accounting

1. Martin Walker
2. Christopher S. Armstrong
3. Terry Shevlin
4. Qiang Cheng
5. Weili Ge
6. Jeong‐Bon Kim
7. David F. Larcker
8. W. Guay

In Finance

1. Martin Walker
2. Qiang Cheng
3. David F. Larcker
4. Christopher S. Armstrong
5. Terry Shevlin
6. Weili Ge
7. Patricia M. Dechow
8. Catherine Schrand

Citations in the corpus

• Corporate Fraud and Managers’ Behavior: Evidence from the Press (2010, result): “This evidence is in line with Coffee (2005) which states that “when one pays the CEO with stock options, one creates incentives for short-term financial manipulation and accounting gamesmanship” (p.”
• Managerial Incentives and Stock Price Manipulation (2013, neutral): “Proof of Proposition 2. Rewriting ( 9 ) in logarithmic form and substituting out for M and E using equation (10) and � using equation (13):”
• Substitution between Real and Accruals-Based Earnings Management after Voluntary Adoption of Compensation Clawback Provisions (2015, positive): “Next, we add control variables related to executive compensation and reestimate Equation (6) because earnings manipulation activities are affected by incentives stemming from option grants or managers’ stock holdings (Cheng and Warfield 2005; Bergstresser and Philippon 2006; Efendi, Srivastava, and ”
• CEO Narcissism and Accounting: A Picture of Profits (2014, background): “Empirical evidence on earnings management has shown a distinct relationship between CEO incentives and earnings management (Healy and Whalen 1999; Bergstresser and Philippon 2006), as well as the likelihood of beating analysts’ forecasts (Cheng and Warfield 2005).”
• Performance, Growth and Earnings Management (2006, background): “For example, DeFond and Subramanyam (1998) control cash flows; Cheng and Warfield (2005) control earnings growth; Teoh et al.”
• Employee Quality and Financial Reporting Outcomes (2017, neutral): “…academic research frequently focuses on senior executives and their role in the financial reporting process (Bergstresser and Phillipon 2006; Cheng and Warfield 2005; Feng, Ge, Luo, and Shevlin 2011; Hennes et al. 2008; Bamber, Jiang, and Wang 2010), we know relatively little about the…”
• Female executives and earnings management (2010, background): “Previous studies indicate that the above firm characteristics are useful predictors of earnings management (see e.g. Cheng and Warfield, 2005; Francis et al., 2005; Geiger and North, 2006; Meek et al., 2007).”
• Accrual-Based and Real Earnings Management Activities Around Seasoned Equity Offerings (2010, background): “…managers’ incentives to hype earnings and, consequently, stock prices, which contributed to the 1990s stock market bubble.9 Given the evidence in Cheng and Warfield (2005) and Bergstresser and Philippon (2005), we include in our model two variables related to performance-based compensation:…”
• Ownership Structure and Earnings Management: Evidence from Portugal (2012, background): “In this sense, the results of prior studies indicate that CEOs manage earnings to maximise their personal wealth (Cheng & Warfield 2005; Guidry et al 1999; Healy 1985; Holthausen et al. 1995).”
• Understanding Earnings Quality: A Review of the Proxies, Their Determinants and Their Consequences (2010, background): “…between target beating and firms’ equity market incentives to meet or beat a target, where equity market incentives derive from the ownership structure of the firm (Matsumoto, 2002; Beatty et al., 2002) or managers’ compensation/stock ownership (Cheng and Warfield, 2005; McVay et al., 2006).”
• Labor Unemployment Insurance and Earnings Management (2016, neutral): “care about the financial security of their employer (Brown and Matsa, 2013), and one way they assess this is through their employer’s earnings performance (e.g., Burgstahler and Dichev, 1997; Matsumoto, 2002; Cheng and Warfield, 2005; Graham et al., 2005).”