Accounting irregularities, management compensation structure and information asymmetry

Abstract

The discovery of accounting irregularities is an important negative event for a company. The restatement resulting from the irregularity represents an average of 364 per cent of net income for the 152-firm sample and the irregularities are predominantly revenue enhancing. The irregularity firms exhibit both lower transparency and visibility compared to a matched sample of non-irregularity firms. Furthermore, prior to the announcement, these firms experienced poorer operating performance and their executive compensation structure is found to be significantly more equity-based. Therefore, firms that have greater opportunity and incentive are shown to be more likely to commit accounting irregularities. Copyright (c) The Authors. Journal compilation (c) 2008 AFAANZ.

Corporate Governance and Accountability

“…Numerous studies have sought to establish a link between equity-based incentive pay and accounting fraud. Bergstresser and Philippon (2006), Elayan, Li, and Meyer (2008), and Zhang, Bartol, Smith, Pfarrer, and Khanin (2008) all find a positive correlation between earnings management and high levels of equity compensation. A study by Baker, Collins, and Reitenga (2003) suggests that managers are more likely to engage in earnings management when their total compensation depends heavily on financial performance, as through stock options.…”

Timing of earnings restatements: CEO equity compensation and market reaction

“…Matolcsy and Wright, ; Benson et al ., ; Hsieh et al ., ) has thoroughly examined CEO compensation. However, the relation between equity compensation and manager incentives is inconclusive (Elayan et al ., ; Armstrong et al ., ; Adut et al ., ). Furthermore, several researchers (e.g.…”

“…Relying on agency theory (Jensen and Meckling, ), information manipulation theory (McCornack, ) and prior empirical findings (e.g. Graham et al ., ; Elayan et al ., ; Schmidt and Wilkins, ), this study examines the effect of incentive‐based compensation on the dark period. The sample size consists of 302 accounting restatements from USA‐listed companies over the 2005–2007 periods.…”

Female directors and earnings management: Evidence from UK companies

“…ROA is proxy for firm financial performance, and expected that the firms with higher financial performance tend to manage earnings downwards (Watts and Zimmerman 1990). LEV is used as proxy for debt covenant violation (Elayan et al 2008). …”