Shareholder Activism and Earnings Management Incentives: An Empirical Examination of Shareholder Proposals in the United States

Abstract

In this article, we investigate the effect of shareholder activism on earnings management. Using a US sample of shareholder pay-for-performance proposals sponsored by institutional investors, we find that when compared to control firms, firms targeted by shareholder proposals have a greater magnitude of discretionary accruals (DA) in their reported earnings. In addition, we find that the likelihood of meeting or beating earnings benchmarks through the use of DA is higher for targeted firms whose managers have job security concerns due to the firms' inferior stock performance in the past or have plans to sell company stock. Our results are consistent with the notion that payfor-performance proposals have unintended consequences by introducing or exacerbating incentives to manage earnings for short-term gains. The results also indicate that, for financial reporting, the short-termism effect may dominate the alignment and/or disciplinary effect of shareholder monitoring.

Corporate governance factors as predictors of earnings management

“…Majority of the past literature posits EM by managers to be opportunistic in nature which means that it is a tool used by managers for securing private gains either for self or for few stakeholders (Jeanjean, 2002; Schipper, 1989; Watts and Zimmerman, 1986; Lin and Wu, 2014). From an informational perspective however, EM is a strategic instrument used by managers to signal information unknown to markets about the firm’s future performance in order to create value for stakeholders (Altamuro et al, 2005; Ahmed et al, 1999; Sun et al, 2013). There are five main theories proposed in the literature to explain why managers indulge in EM.…”

“…According to signaling theory, proposed by Spence (1973) and elaborated by Ross (1977), in an imperfect market characterized by information asymmetry, managers with access to most private information about the firm are in a position to send signals to the markets which rely on information in public domain to make economic decisions (Aerts et al, 2013). Managers can incorporate future expected performance, not known to markets, in the present earnings to bring alignment between market’s and firm’s expectations about its future performance (Sun et al, 2013). Signaling theory therefore supports informational perspective of EM (Ahmed et al, 1999; Altamuro et al, 2005).…”

Earnings Management and Ownership Structure: Evidence from Sri Lanka

“…In fact, accounting accruals, by their very nature, give management the discretion of deciding when to report certain earnings (Alzoubi, 2016). Further, it is widely perceived that managers exploit this discretion opportunistically and engage in earnings management practices, for their own personal gain (Watts & Zimmerman, 1986;Subramanyam, 1996;Guay et al, 1996;Demski, 1998;Hao & Yao, 2010;Jiraporn, Miller, Yoon, & Kim, 2008).…”

“…Thus, the regulators throughout the world started to focus on corporate governance mechanisms, especially the ownership structure dimensions to enhance the quality of financial reporting (Al-Fayoumi et al, 2010). However, very few studies in the recent past, especially in emerging economies, have addressed the impact of ownership structure on informativeness of the reported figures (Samarakoon, 1999;Sun, Wang, Wang, & Zhang, 2013). In case of Sri Lanka, researchers have rarely contributed to the effect of ownership structures on earnings management literature.…”

قیاس وتفسیر العلاقة بین ممارسات إدارة الأرباح وجودة الخصائص النوعیة للمعلومات المحاسبیة للشرکات المتداول أسهمها فی سوق الأوراق المالیة المصریة : دراسة تطبیقیة

“…Earnings (Algharaballi, 2013;Hillegeist, 2011;Salah & Ahmed, 2005;Dechow & Skinner, 2000) ‫دم‬ Sun et al, 2013;Clikeman, 2003 ) .…”