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Executive compensation and earnings management under moral hazard

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  • Sun, Bo

Abstract

This paper analyzes executive compensation in a setting where managers may take a costly action to manipulate corporate performance, and whether managers do so is stochastic. We show that an increase in the possibility of manipulation actually calls for executive pay to be more responsive to reported performance. In addition, regulatory reforms that increase the cost involved in manipulation may lead to reduced pay-for-performance sensitivities. The time-series and cross-sectional variations of executive compensation lend support to our model.

Suggested Citation

  • Sun, Bo, 2014. "Executive compensation and earnings management under moral hazard," Journal of Economic Dynamics and Control, Elsevier, vol. 41(C), pages 276-290.
    • Handle: RePEc:eee:dyncon:v:41:y:2014:i:c:p:276-290
    DOI: 10.1016/j.jedc.2014.02.004
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Liu, Qi & Sun, Bo, 2015. "Managerial compensation under privately-observed hedging and earnings management," Economics Letters, Elsevier, vol. 137(C), pages 1-4.
    2. Koch, Timothy W. & Waggoner, Daniel F. & Wall, Larry D., 2018. "Incentive compensation, accounting discretion and bank capital," Journal of Economics and Business, Elsevier, vol. 95(C), pages 119-140.
    3. McWay, Ryan & Saona, Paolo & Muro, Laura & Jara, Mauricio, 2019. "Contrasting Incentives for Earnings Management: Board Activity and Board Remuneration in Spanish Firms," OSF Preprints xgn3y, Center for Open Science.
    4. Hani El-Chaarani, 2017. "The Mutual Impacts of Corporate Governance Dimensions and Legal Protection Systems on the Performance of European Banks: A Post-Crisis Study," European Research Studies Journal, European Research Studies Journal, vol. 0(2A), pages 538-567.
    5. Bo Sun, 2013. "The optimal shape of compensation contracts with earnings management," Applied Economics, Taylor & Francis Journals, vol. 45(21), pages 3102-3109, July.
    6. Mijoo Lee & In Tae Hwang, 2019. "The Effect of the Compensation System on Earnings Management and Sustainability: Evidence from Korea Banks," Sustainability, MDPI, Open Access Journal, vol. 11(11), pages 1-1, June.

    More about this item

    Keywords

    Earnings management; Executive compensation; Optimal contract; Corporate governance;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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