An Empirical Analysis of The Effects of Monitoring Intensity on The Relation between Equity Incentives and Earnings Management
November 2013 | Ahmed, Anwer
Prior studies suggest that equity incentives inherently have both an interest alignment effect and an opportunistic financial reporting effect. We argue that which effect dominates depends upon the firm’s level of monitoring. Using proxies for accrual-based earnings management and meet/beat analyst forecast models we find evidence consistent with the view that that for firms with low monitoring the opportunistic financial reporting effects of equity incentives dominate the incentive alignments effects. Using proxies based on real earnings management and accounting irregularities we find that, for low monitoring firms, the opportunistic reporting effect mitigates the benefits of the incentive alignment effect. Overall these results are consistent with the level of monitoring affecting the relation between equity incentives and earnings management.
- Scott Duellman
- Ahmed M. Abdel-Meguid
Journal of Accounting & Public Policy