Keywords

earnings management, equity compensation, rank and file employees, accrual-based earnings management, real earnings management, equity incentives, stock options, financial reporting quality, earnings quality, fraud

Abstract

The wide-spread use of rank and file equity-based compensation suggests that executives believe that rank and file employees can affect firm outcomes, and some research supports this view. If equity-based incentives influence rank and file employees’ productive efforts, they might also influence their earnings management decisions. We find that increases in rank and file employees’ option-based compensation—our proxy for equity-based compensation—are associated with increases in earnings management and that this relation is attributable to real activities (as opposed to accrual) earnings management. Cross-sectional tests indicate that the relation is stronger when rank and file option compensation is likely to generate greater performance incentives and attenuated in the presence of more intense monitoring. Finally, we explore the role of cash constraints and overvaluation as potential alternative explanations for this relation and find that neither accounts for our results.

Original Publication Citation

K. Holderness, A. Huffman, and M. Lewis-Western. 2019. “Rank and File Equity Compensation and Earnings Management: Evidence from Stock Options”, Journal of Business Finance and Accounting 46 (9-10): 1201–1236.

Document Type

Peer-Reviewed Article

Publication Date

2019

Publisher

Journal of Business Finance and Accounting

Language

English

College

Marriott School of Business

Department

Accountancy

University Standing at Time of Publication

Full Professor

Download

Included in

Accounting Commons

Share

COinS