Earnings Management from the Bottom Up: An Analysis of Managerial Incentives Below the CEO
Many studies as well as anecdotes document a link between the structure of chief executive officer (CEO) compensation and various measures of earnings manipulation. In this paper, HBS professors Oberholzer-Gee and Wulf analyze all components of compensation packages for CEOs and for managers at lower levels in a large sample of firms over more than 10 years, between 1986 and 1999. Results suggest that the effects of incentive pay on earnings management vary considerably by both type of incentive pay and position. Overall, it appears that the primary focus of compensation committees on equity incentives for CEOs overlooks a critical component in curbing earnings manipulation. If one wanted to weaken incentive pay to get more truthful reporting, diluting bonuses-particularly that of the chief financial officer (CFO)-would be the place to start. This may be the first study to analyze the relationship between CEO, division manager, and CFO compensation and earnings management. Key concepts include: It is important to look at positions below the CEO because it is unclear if all or even most financial misreporting is decided at the top. In addition to division managers, the importance of the CFO's role in financial reporting and the numerous recent corporate fraud cases suggest that CFOs can significantly affect accounting quality. Companies report significantly higher discretionary accruals and excess sales and have a higher incidence of future lawsuits when CFOs are paid larger bonuses. Importantly, the magnitudes of these effects are much larger for CFOs in comparison to both CEOs and division managers. Since the quality of financial reporting is difficult to assess, the researchers have used various measures of earnings manipulation in this study, including discretionary accounting accruals, end-of-year excess sales, and class action litigation. Closed for comment; 0 Comment(s) posted.
Journal of Management Information Systems
Description: The Journal of Management Information Systems is a widely recognized and top-ranked forum for the presentation of research that advances the practice and understanding of organizational information systems. It serves those investigating new modes of information delivery and the changing landscape of information policy making, as well as practitioners and executives managing the information resource. A vital aim of the quarterly is to bridge the gap between theory and practice of management information systems.
Coverage: 1984-2010 (Vol. 1, No. 1 - Vol. 27, No. 3)
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Subjects: Business & Economics, Business
Collections: Arts & Sciences X Collection, Business & Economics Collection, Business III Collection