IDEAS home Printed from https://ideas.repec.org/a/eee/jocaae/v12y2016i3p241-256.html
   My bibliography  Save this article

The effects of the 2006 SEC executive compensation disclosure rules on managerial incentives

Author

Listed:
  • Espahbodi, Reza
  • Liu, Nan
  • Westbrook, Amy

Abstract

In 2006, the SEC amended the disclosure requirements for executive compensation and stock ownership. This paper examines the effects of these amendments on (1) the association between equity-based executive incentives and firm payout choice, and (2) the association between executive compensation and earnings management. We find that after the effective date of the SEC rules, the positive associations between executive stock option holdings and firm open-market repurchases, and between executive shareholdings and firm dividend payouts, have weakened. In addition, the positive associations between bonus and discretionary accruals, between bonus and real earnings management, and between equity compensation and real earnings management, have decreased. In general, these findings are consistent with the notion that the 2006 SEC disclosure rules lowered management's self-interested actions by mitigating the information asymmetry between investors and managers.

Suggested Citation

  • Espahbodi, Reza & Liu, Nan & Westbrook, Amy, 2016. "The effects of the 2006 SEC executive compensation disclosure rules on managerial incentives," Journal of Contemporary Accounting and Economics, Elsevier, vol. 12(3), pages 241-256.
    • Handle: RePEc:eee:jocaae:v:12:y:2016:i:3:p:241-256
    DOI: 10.1016/j.jcae.2016.09.003
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1815566916300509
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jcae.2016.09.003?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Margaret Weber, 2006. "Sensitivity of executive wealth to stock price, corporate governance and earnings management," Review of Accounting and Finance, Emerald Group Publishing, vol. 5(4), pages 321-354, November.
    2. Baker, H. Kent & Powell, Gary E. & Veit, E. Theodore, 2002. "Revisiting the dividend puzzle: Do all of the pieces now fit?," Review of Financial Economics, Elsevier, vol. 11(4), pages 241-261.
    3. Gustavo Grullon & Roni Michaely, 2002. "Dividends, Share Repurchases, and the Substitution Hypothesis," Journal of Finance, American Finance Association, vol. 57(4), pages 1649-1684, August.
    4. Brennan, Michael J & Thakor, Anjan V, 1990. "Shareholder Preferences and Dividend Policy," Journal of Finance, American Finance Association, vol. 45(4), pages 993-1018, September.
    5. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-329, May.
    6. Jones, Jj, 1991. "Earnings Management During Import Relief Investigations," Journal of Accounting Research, Wiley Blackwell, vol. 29(2), pages 193-228.
    7. Lambert, Richard A. & Lanen, William N. & Larcker, David F., 1989. "Executive Stock Option Plans and Corporate Dividend Policy," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 24(4), pages 409-425, December.
    8. Eli Bartov & Itzhak Krinsky & Jason Lee, 1998. "Evidence On How Companies Choose Between Dividends And Open‐Market Stock Repurchases," Journal of Applied Corporate Finance, Morgan Stanley, vol. 11(1), pages 89-96, March.
    9. Jeffrey R. Brown & Nellie Liang & Scott Weisbenner, 2007. "Executive Financial Incentives and Payout Policy: Firm Responses to the 2003 Dividend Tax Cut," Journal of Finance, American Finance Association, vol. 62(4), pages 1935-1965, August.
    10. Hribar, Paul & Jenkins, Nicole Thorne & Johnson, W. Bruce, 2006. "Stock repurchases as an earnings management device," Journal of Accounting and Economics, Elsevier, vol. 41(1-2), pages 3-27, April.
    11. Roychowdhury, Sugata, 2006. "Earnings management through real activities manipulation," Journal of Accounting and Economics, Elsevier, vol. 42(3), pages 335-370, December.
    12. Gaver, Jennifer J. & Gaver, Kenneth M. & Austin, Jeffrey R., 1995. "Additional evidence on bonus plans and income management," Journal of Accounting and Economics, Elsevier, vol. 19(1), pages 3-28, February.
    13. Christine Jolls, 1998. "Stock Repurchases and Incentive Compensation," NBER Working Papers 6467, National Bureau of Economic Research, Inc.
    14. Easterbrook, Frank H, 1984. "Two Agency-Cost Explanations of Dividends," American Economic Review, American Economic Association, vol. 74(4), pages 650-659, September.
    15. Brav, Alon & Graham, John R. & Harvey, Campbell R. & Michaely, Roni, 2005. "Payout policy in the 21st century," Journal of Financial Economics, Elsevier, vol. 77(3), pages 483-527, September.
    16. Dechow, Patricia M. & Myers, Linda A. & Shakespeare, Catherine, 2010. "Fair value accounting and gains from asset securitizations: A convenient earnings management tool with compensation side-benefits," Journal of Accounting and Economics, Elsevier, vol. 49(1-2), pages 2-25, February.
    17. Bergstresser, Daniel & Philippon, Thomas, 2006. "CEO incentives and earnings management," Journal of Financial Economics, Elsevier, vol. 80(3), pages 511-529, June.
    18. Burns, Natasha & Kedia, Simi, 2006. "The impact of performance-based compensation on misreporting," Journal of Financial Economics, Elsevier, vol. 79(1), pages 35-67, January.
    19. Guojin Gong & Henock Louis & Amy X. Sun, 2008. "Earnings Management and Firm Performance Following Open‐Market Repurchases," Journal of Finance, American Finance Association, vol. 63(2), pages 947-986, April.
    20. Healy, Paul M. & Palepu, Krishna G., 1988. "Earnings information conveyed by dividend initiations and omissions," Journal of Financial Economics, Elsevier, vol. 21(2), pages 149-175, September.
    21. Barclay, M.J. & Smith, C.W., 1988. "Corporate Payout Policy: Cash Dividencds Versus Open- Market Repurchases," Papers 88-10, Rochester, Business - Managerial Economics Research Center.
    22. Anwar Boumosleh, 2009. "Director Compensation and the Reliability of Accounting Information," The Financial Review, Eastern Finance Association, vol. 44(4), pages 525-539, November.
    23. Jagannathan, Murali & Stephens, Clifford P. & Weisbach, Michael S., 2000. "Financial flexibility and the choice between dividends and stock repurchases," Journal of Financial Economics, Elsevier, vol. 57(3), pages 355-384, September.
    24. Berger, Philip G & Ofek, Eli & Yermack, David L, 1997. "Managerial Entrenchment and Capital Structure Decisions," Journal of Finance, American Finance Association, vol. 52(4), pages 1411-1438, September.
    25. Aharony, Joseph & Swary, Itzhak, 1980. "Qtrly Dividend and Earnings Announcements and Stockholders' Returns: An Empirical Analysis," Journal of Finance, American Finance Association, vol. 35(1), pages 1-12, March.
    26. Dechow, Patricia M. & Kothari, S. P. & L. Watts, Ross, 1998. "The relation between earnings and cash flows," Journal of Accounting and Economics, Elsevier, vol. 25(2), pages 133-168, May.
    27. Lippert, Robert L & Nixon, Terry D & Pilotte, Eugene A, 2000. "Incentive Compensation and the Stock Price Response to Dividend Increase Announcements," The Financial Review, Eastern Finance Association, vol. 35(4), pages 69-93, November.
    28. Barclay, Michael J. & Smith, Clifford Jr., 1988. "Corporate payout policy : Cash Dividends versus Open-Market Repurchases," Journal of Financial Economics, Elsevier, vol. 22(1), pages 61-82, October.
    29. Gustavo Grullon & Roni Michaely & Bhaskaran Swaminathan, 2002. "Are Dividend Changes a Sign of Firm Maturity?," The Journal of Business, University of Chicago Press, vol. 75(3), pages 387-424, July.
    30. Kothari, S.P. & Leone, Andrew J. & Wasley, Charles E., 2005. "Performance matched discretionary accrual measures," Journal of Accounting and Economics, Elsevier, vol. 39(1), pages 163-197, February.
    31. Burgstahler, David & Dichev, Ilia, 1997. "Earnings management to avoid earnings decreases and losses," Journal of Accounting and Economics, Elsevier, vol. 24(1), pages 99-126, December.
    32. Cohen, Daniel A. & Zarowin, Paul, 2010. "Accrual-based and real earnings management activities around seasoned equity offerings," Journal of Accounting and Economics, Elsevier, vol. 50(1), pages 2-19, May.
    33. Gustavo Grullon & David L. Ikenberry, 2000. "What Do We Know About Stock Repurchases?," Journal of Applied Corporate Finance, Morgan Stanley, vol. 13(1), pages 31-51, March.
    34. Dittmar, Amy K, 2000. "Why Do Firms Repurchase Stock?," The Journal of Business, University of Chicago Press, vol. 73(3), pages 331-355, July.
    35. Bens, Daniel A. & Nagar, Venky & Skinner, Douglas J. & Wong, M. H. Franco, 2003. "Employee stock options, EPS dilution, and stock repurchases," Journal of Accounting and Economics, Elsevier, vol. 36(1-3), pages 51-90, December.
    36. Healy, Paul M., 1985. "The effect of bonus schemes on accounting decisions," Journal of Accounting and Economics, Elsevier, vol. 7(1-3), pages 85-107, April.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Alquhaif, Abdulsalam & Al-Gamrh, Bakr & Abdul Latif, Rohaida, 2020. "An overview of share buybacks: A descriptive case from Malaysia," Journal of Behavioral and Experimental Finance, Elsevier, vol. 28(C).
    2. Dechow, Patricia & Ge, Weili & Schrand, Catherine, 2010. "Understanding earnings quality: A review of the proxies, their determinants and their consequences," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 344-401, December.
    3. Espahbodi, Reza & Liu, Nan & Weigand, Robert A., 2022. "Opportunistic earnings management or performance-related effects? Evidence from dividend-paying firms," Global Finance Journal, Elsevier, vol. 54(C).
    4. H.Kent Baker & Gary E. Powell & E.Theodore Veit, 2002. "Revisiting the dividend puzzle," Review of Financial Economics, John Wiley & Sons, vol. 11(4), pages 241-261.
    5. repec:bof:bofrdp:urn:nbn:fi:bof-201508131351 is not listed on IDEAS
    6. Francis, Bill & Hasan, Iftekhar & Li, Lingxiang, 2015. "Evidence for the existence of downward real earnings management," Bank of Finland Research Discussion Papers 13/2015, Bank of Finland.
    7. Francis, Bill & Hasan, Iftekhar & Li, Lingxiang, 2015. "Evidence for the existence of downward real earnings management," Research Discussion Papers 13/2015, Bank of Finland.
    8. repec:zbw:bofrdp:2015_013 is not listed on IDEAS
    9. Lauren A. Cooper & Jimmy F. Downes & Ramesh P. Rao, 2018. "Short term real earnings management prior to stock repurchases," Review of Quantitative Finance and Accounting, Springer, vol. 50(1), pages 95-128, January.
    10. Yuan‐Teng Hsu & Chia‐Wei Huang, 2020. "Why do stock repurchases change over time?," European Financial Management, European Financial Management Association, vol. 26(4), pages 938-957, September.
    11. repec:zbw:bofrdp:urn:nbn:fi:bof-201508131351 is not listed on IDEAS
    12. Renneboog, L.D.R. & Trojanowski, G., 2005. "Patterns in Payout Policy and Payout Channel Choice of UK Firms in the 1990s," Discussion Paper 2005-002, Tilburg University, Tilburg Law and Economic Center.
    13. Haw, In-Mu & Ho, Simon S.M. & Hu, Bingbing & Zhang, Xu, 2013. "Legal Institutions, Ownership Concentration, and Stock Repurchases Around the World: Signal Mimicking?," The International Journal of Accounting, Elsevier, vol. 48(4), pages 427-458.
    14. Baker, H. Kent & Powell, Gary E. & Veit, E. Theodore, 2002. "Revisiting the dividend puzzle: Do all of the pieces now fit?," Review of Financial Economics, Elsevier, vol. 11(4), pages 241-261.
    15. Luís Krug Pacheco & Clara Raposo, 2009. "ON the TIMING of INITIAL STOCK REPURCHASES," Working Papers de Gestão (Management Working Papers) 06, Católica Porto Business School, Universidade Católica Portuguesa.
    16. du Jardin, Philippe & Séverin, Eric, 2011. "Dividend policy," MPRA Paper 44382, University Library of Munich, Germany.
    17. James, Hui & Benson, Bradley W. & Wu, Chen (Ken), 2017. "Does CEO ownership affect payout policy? Evidence from using CEO scaled wealth-performance sensitivity," The Quarterly Review of Economics and Finance, Elsevier, vol. 65(C), pages 328-345.
    18. Brav, Alon & Graham, John R. & Harvey, Campbell R. & Michaely, Roni, 2005. "Payout policy in the 21st century," Journal of Financial Economics, Elsevier, vol. 77(3), pages 483-527, September.
    19. Gerald J. Lobo & Ashok Robin & Kean Wu, 2020. "Share repurchases and accounting conservatism," Review of Quantitative Finance and Accounting, Springer, vol. 54(2), pages 699-733, February.
    20. Zhang, Dan, 2018. "CEO dividend protection," Journal of Empirical Finance, Elsevier, vol. 45(C), pages 194-211.
    21. Julia Sawicki & Keshab Shrestha, 2014. "Misvaluation and Insider Trading Incentives for Accrual-based and Real Earnings Management," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 41(7-8), pages 926-949, September.
    22. Kumar, Praveen & Langberg, Nisan & Oded, Jacob & Sivaramakrishnan, K., 2017. "Voluntary disclosure and strategic stock repurchases," Journal of Accounting and Economics, Elsevier, vol. 63(2), pages 207-230.
    23. Cook, Douglas O. & Zhang, Weiwei, 2022. "CEO option incentives and corporate share repurchases," International Review of Economics & Finance, Elsevier, vol. 78(C), pages 355-376.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jocaae:v:12:y:2016:i:3:p:241-256. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: https://www.journals.elsevier.com/journal-of-contemporary-accounting-and-economics .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.