Performance‐vested Stock Options and Earnings Management*

Abstract

This paper investigates the effects of performance-vested stock options (PVSOs) on the propensity of managers to engage in earnings management. Using observations from the 240 largest non-financial firms in the UK, I show that managers are more likely to engage in earnings management when they hold a larger proportion of their compensation in PVSOs. When categorizing PVSOs on the basis of their distance from the end of performance periods, the results show that managerial incentives to manage earnings mainly stem from PVSOs that are granted in prior years but within a performance evaluation period (i.e., PVSOs before vesting). Moreover, vesting targets influence the relationship between earnings management and PVSO compensation. The findings are consistent with the earnings smoothing hypothesis: confronted with more ambitious vesting targets, managers who are heavily loaded with PVSOs before vesting will report higher performance by generating greater accounting accruals, whereas in years with good performance, these managers will have incentives to reduce current reported performance by managing earnings downward so they can increase earnings as needed in the future.

Where Are All the Women? Institutional Context and the Prevalence of Women on the Corporate Board of Directors

“…The table below lists the countries for which data were obtained detailing the percentage number of women on the corporate board or equivalent highest decision-making body. Management Diagnostics Limited which has been successfully used in academic research (Singh, 2007;Kuang 2008;Fracassi and Tate, 2008) and which is rapidly establishing itself as the premier source of board-related data (Fernandes, 2009 BoardEx was used to identify percentage number of women both at the country and at the industry level. At the industry level firms were classified based on Standard Industrial Classification (SIC) codes to enable industry evaluation of the prevalence on women board directors.…”

Female CEOs and Core Earnings Quality: New Evidence on the Ethics Versus Risk-Aversion Puzzle

“…Second, the extant research shows that some firms have higher incentives to manage earnings than others do and, therefore, in order to increase the power of the results, we repeat our analysis using a sample of firms that have a strong motivation to manage earnings. Prior studies (for example, Baker et al 2003;Bergstresser and Philippon 2006;Cheng and Warfield 2005;Kuang 2008;McAnally et al 2008) have showed that CEOs with high stock ownership tend to engage more in earnings management in Table 4 The association between female CEOs and classification shifting (firms with income-decreasing SPI)…”

Managerial Incentives and Audit Fees: Evidence from the Mutual Fund Industry

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