IDEAS home Printed from https://ideas.repec.org/a/gam/jsusta/v11y2019i12p3421-d241802.html
   My bibliography  Save this article

CSR-Contingent Executive Compensation Incentive and Earnings Management

Author

Listed:
  • Zhichuan (Frank) Li

    (Ivey Business School, University of Western Ontario, London, ON N6A 3K7, Canada)

  • Caleb Thibodeau

    (Department of Economics, University of Western Ontario, London, ON N6A 3K7, Canada)

Abstract

This paper empirically studies the connection between earnings management and corporate social performance, conditional on the existence of CSR-contingent executive compensation contracts, an emerging practice to link executive compensation to corporate social performance. We find that executives are more likely to manipulate earnings to achieve their personal compensation goals when CSR rating is low, as well as their CSR-contingent compensation. Because of public pressure on their excessive total compensation, corporate executives see no need to manipulate earnings to increase compensation when their CSR-contingent compensation is already high. Our results suggest that earnings management and CSR-contingent compensation are substitute tools to serve the interests of executives, which is an agency problem that was never previously studied. Additionally, we explore how managerial characteristics affect earnings management, driven by the incentive effects of CSR-linked compensation.

Suggested Citation

  • Zhichuan (Frank) Li & Caleb Thibodeau, 2019. "CSR-Contingent Executive Compensation Incentive and Earnings Management," Sustainability, MDPI, vol. 11(12), pages 1-12, June.
    • Handle: RePEc:gam:jsusta:v:11:y:2019:i:12:p:3421-:d:241802
    as

    Download full text from publisher

    File URL: https://www.mdpi.com/2071-1050/11/12/3421/pdf
    Download Restriction: no
    File URL: https://www.mdpi.com/2071-1050/11/12/3421/
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Li, Zhichuan & Minor, Dylan B. & Wang, Jun & Yu, Chong, 2019. "A learning curve of the market: Chasing alpha of socially responsible firms," Journal of Economic Dynamics and Control, Elsevier, vol. 109(C).
    2. DeAngelo, Harry & DeAngelo, Linda, 1991. "Union negotiations and corporate policy *1: A study of labor concessions in the domestic steel industry during the 1980s," Journal of Financial Economics, Elsevier, vol. 30(1), pages 3-43, November.
    3. Stephen Brammer & Chris Brooks & Stephen Pavelin, 2006. "Corporate Social Performance and Stock Returns: UK Evidence from Disaggregate Measures," Financial Management, Financial Management Association International, vol. 35(3), pages 97-116, September.
    4. Henri Servaes & Ane Tamayo, 2013. "The Impact of Corporate Social Responsibility on Firm Value: The Role of Customer Awareness," Management Science, INFORMS, vol. 59(5), pages 1045-1061, May.
    5. Werther, William Jr. & Chandler, David, 2005. "Strategic corporate social responsibility as global brand insurance," Business Horizons, Elsevier, vol. 48(4), pages 317-324.
    6. Prior, Diego & Surroca Aguilar, Jorge & Tribo Gine, José Antonio, 2007. "Earnings management and corporate social responsibility," DEE - Working Papers. Business Economics. WB wb062306, Universidad Carlos III de Madrid. Departamento de Economía de la Empresa.
    7. Guidry, Flora & J. Leone, Andrew & Rock, Steve, 1999. "Earnings-based bonus plans and earnings management by business-unit managers1," Journal of Accounting and Economics, Elsevier, vol. 26(1-3), pages 113-142, January.
    8. Xavier Giroud & Holger M. Mueller, 2011. "Corporate Governance, Product Market Competition, and Equity Prices," Journal of Finance, American Finance Association, vol. 66(2), pages 563-600, April.
    9. Conyon, Martin J & Murphy, Kevin J, 2000. "The Prince and the Pauper? CEO Pay in the United States and United Kingdom," Economic Journal, Royal Economic Society, vol. 110(467), pages 640-671, November.
    10. Bauer, Rob & Koedijk, Kees & Otten, Roger, 2005. "International evidence on ethical mutual fund performance and investment style," Journal of Banking & Finance, Elsevier, vol. 29(7), pages 1751-1767, July.
    11. Dang, Chongyu & (Frank) Li, Zhichuan & Yang, Chen, 2018. "Measuring firm size in empirical corporate finance," Journal of Banking & Finance, Elsevier, vol. 86(C), pages 159-176.
    12. Wallace Davidson & Biao Xie & Weihong Xu & Yixi Ning, 2007. "The influence of executive age, career horizon and incentives on pre-turnover earnings management," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 11(1), pages 45-60, March.
    13. Li, Zhichuan Frank & Lin, Shannon & Sun, Shuna & Tucker, Alan, 2018. "Risk-adjusted inside debt," Global Finance Journal, Elsevier, vol. 35(C), pages 12-42.
    14. Steven Balsam, 1998. "Discretionary Accounting Choices and CEO Compensation," Contemporary Accounting Research, John Wiley & Sons, vol. 15(3), pages 229-252, September.
    15. Holthausen, Robert W. & Larcker, David F. & Sloan, Richard G., 1995. "Annual bonus schemes and the manipulation of earnings," Journal of Accounting and Economics, Elsevier, vol. 19(1), pages 29-74, February.
    16. Bebchuk, Lucian A. & Fried, Jesse M., 2003. "Executive Compensation as an Agency Problem," Berkeley Olin Program in Law & Economics, Working Paper Series qt81q3136r, Berkeley Olin Program in Law & Economics.
    17. Frank Li & Tao Li & Dylan Minor, 2016. "CEO power, corporate social responsibility, and firm value: a test of agency theory," International Journal of Managerial Finance, Emerald Group Publishing Limited, vol. 12(5), pages 611-628, October.
    18. Lucian Arye Bebchuk & Jesse M. Fried, 2003. "Executive Compensation as an Agency Problem," Journal of Economic Perspectives, American Economic Association, vol. 17(3), pages 71-92, Summer.
    19. Jones, Jj, 1991. "Earnings Management During Import Relief Investigations," Journal of Accounting Research, Wiley Blackwell, vol. 29(2), pages 193-228.
    20. Bryan Hong & Zhichuan Li & Dylan Minor, 2016. "Corporate Governance and Executive Compensation for Corporate Social Responsibility," Journal of Business Ethics, Springer, vol. 136(1), pages 199-213, June.
    21. Jeffrey L Coles & Zhichuan (Frank) Li & Albert Y Wang, 2018. "Industry Tournament Incentives," The Review of Financial Studies, Society for Financial Studies, vol. 31(4), pages 1418-1459.
    22. 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.
    23. DeAngelo, H,, 1991. "Union Negotiation and Corporate Policy : A Study of Labor "Givebacks" in the Domestic Stel Industry During the 1980s," Papers 91-24, Southern California - School of Business Administration.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Mariana Hatmanu & Christiana Brigitte Sandu & Elisabeta Jaba, 2019. "A Comparative Study on Drivers for Corporate Environmental Responsibility, EU15 vs. EU-NMS13," Sustainability, MDPI, vol. 11(22), pages 1-27, November.
    2. Petra F. A. Dilling & Sinan Caykoylu, 2019. "Determinants of Companies that Disclose High-Quality Integrated Reports," Sustainability, MDPI, vol. 11(13), pages 1-31, July.
    3. Alexandre García-Mas & Antonio Núñez Prats & Aurelio Olmedilla & Roberto Ruiz-Barquín & Enrique Cantón, 2019. "Levels of Cognitive Congruence between Managers and Team Members’ Perceptions of Cooperation at Work," Sustainability, MDPI, vol. 11(21), pages 1-11, November.
    4. Camélia Radu & Nadia Smaili, 2022. "Alignment Versus Monitoring: An Examination of the Effect of the CSR Committee and CSR-Linked Executive Compensation on CSR Performance," Journal of Business Ethics, Springer, vol. 180(1), pages 145-163, September.
    5. Frode Kjærland & Ane Tolnes Haugdal & Anna Søndergaard & Anne Vågslid, 2020. "Corporate Governance and Earnings Management in a Nordic Perspective: Evidence from the Oslo Stock Exchange," JRFM, MDPI, vol. 13(11), pages 1-18, October.
    6. Xinpeng Xing & Tiansen Liu & Lin Shen & Jianhua Wang, 2020. "Linking Environmental Regulation and Financial Performance: The Mediating Role of Green Dynamic Capability and Sustainable Innovation," Sustainability, MDPI, vol. 12(3), pages 1-22, January.
    7. Cătălina Silvia Crișan-Mitra & Liana Stanca & Dan-Cristian Dabija, 2020. "Corporate Social Performance: An Assessment Model on an Emerging Market," Sustainability, MDPI, vol. 12(10), pages 1-21, May.
    8. Yu Jia & Jinglu Yan & Tianyuan Liu & Jun Huang, 2019. "How Does Internal and External CSR Affect Employees’ Work Engagement? Exploring Multiple Mediation Mechanisms and Boundary Conditions," IJERPH, MDPI, vol. 16(14), pages 1-17, July.
    9. Won Park & Chunggyu Byun, 2021. "Effect of SME’s Managerial Ability and Executive Compensation on Firm Value," Sustainability, MDPI, vol. 13(21), pages 1-16, October.
    10. Khenissi, Mohamed & Jahmane, Abderrahman & Hofaidhllaoui, Mahrane, 2022. "Does the introduction of CSR criteria into CEO incentive pay reduce their earnings management? The case of companies listed in the SBF 120," Finance Research Letters, Elsevier, vol. 48(C).
    11. Joana Costa, 2021. "Carrots or Sticks: Which Policies Matter the Most in Sustainable Resource Management?," Resources, MDPI, vol. 10(2), pages 1-21, February.
    12. Samar Alharbi & Md Al Mamun & Nader Atawnah, 2021. "Uncovering Real Earnings Management: Pay Attention to Risk-Taking Behavior," IJFS, MDPI, vol. 9(4), pages 1-18, September.
    13. Wenxiu Hu & Jinzhu Du & Weiguo Zhang, 2020. "Corporate Social Responsibility Information Disclosure and Innovation Sustainability: Evidence from China," Sustainability, MDPI, vol. 12(1), pages 1-19, January.
    14. Xiumei Xu & Ruolan Jing & Feifei Lu, 2022. "Environmental Regulation, Corporate Social Responsibility (CSR) Disclosure and Enterprise Green Innovation: Evidence from Listed Companies in China," IJERPH, MDPI, vol. 19(22), pages 1-24, November.
    15. Hyun Min Oh & Sam Bock Park & Hee Young Ma, 2020. "Corporate Sustainability Management, Earnings Transparency, and Chaebols," Sustainability, MDPI, vol. 12(10), pages 1-19, May.
    16. Yamina Chouaibi & Ghazi Zouari, 2022. "The effect of corporate social responsibility practices on real earnings management: evidence from a European ESG data," International Journal of Disclosure and Governance, Palgrave Macmillan, vol. 19(1), pages 11-30, March.

    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. Bum†Jin Park, 2017. "Auditors’ Economic Incentives and the Sensitivity of Managerial Pay to Accounting Performance," Australian Accounting Review, CPA Australia, vol. 27(4), pages 382-399, December.
    2. Eriana Kartadjumena & Waymond Rodgers, 2019. "Executive Compensation, Sustainability, Climate, Environmental Concerns, and Company Financial Performance: Evidence from Indonesian Commercial Banks," Sustainability, MDPI, vol. 11(6), pages 1-21, March.
    3. Frank Li & Taylor Morris & Brian Young, 2019. "The Effect of Corporate Visibility on Corporate Social Responsibility," Sustainability, MDPI, vol. 11(13), pages 1-16, July.
    4. Sohail Ahmad Javeed & Lin Lefen, 2019. "An Analysis of Corporate Social Responsibility and Firm Performance with Moderating Effects of CEO Power and Ownership Structure: A Case Study of the Manufacturing Sector of Pakistan," Sustainability, MDPI, vol. 11(1), pages 1-25, January.
    5. Kuang, Y. & Qin, B., 2006. "Performance-vested Stock Options and Pay-Performance Sensitivity," Other publications TiSEM 13484e72-b9cf-4c3a-8fc5-3, Tilburg University, School of Economics and Management.
    6. Elif Akben-Selcuk, 2019. "Corporate Social Responsibility and Financial Performance: The Moderating Role of Ownership Concentration in Turkey," Sustainability, MDPI, vol. 11(13), pages 1-10, July.
    7. Kuang, Y. & Qin, B., 2006. "Performance-vested Stock Options and Pay-Performance Sensitivity," Discussion Paper 2006-123, Tilburg University, Center for Economic Research.
    8. Zhijun Lin & Ming Liu & Carlos Noronha, 2016. "The Impact of Corporate Governance on Informative Earnings Management in the Chinese Market," Abacus, Accounting Foundation, University of Sydney, vol. 52(3), pages 568-609, September.
    9. Dunbar, Craig & Li, Zhichuan (Frank) & Shi, Yaqi, 2020. "CEO risk-taking incentives and corporate social responsibility," Journal of Corporate Finance, Elsevier, vol. 64(C).
    10. Georgios Voulgaris & Konstantinos Stathopoulos & Martin Walker, 2015. "CEO Pay Contracts and IFRS Reconciliations," European Accounting Review, Taylor & Francis Journals, vol. 24(1), pages 63-93, May.
    11. Harakeh, Mostafa & El-Gammal, Walid & Matar, Ghida, 2019. "Female directors, earnings management, and CEO incentive compensation: UK evidence," Research in International Business and Finance, Elsevier, vol. 50(C), pages 153-170.
    12. 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.
    13. Manfred Frühwirth, 2002. "The optimal timing of the transfer of hidden reserves in the German and Austrian tax systems," Intelligent Systems in Accounting, Finance and Management, John Wiley & Sons, Ltd., vol. 11(2), pages 71-88, April.
    14. Giovanna Gavana & Pietro Gottardo & Anna Maria Moisello, 2017. "Earnings Management and CSR Disclosure. Family vs. Non-Family Firms," Sustainability, MDPI, vol. 9(12), pages 1-21, December.
    15. Young Mok Choi & Kunsu Park, 2019. "Foreign Ownership, Agency Costs, and Long-Term Firm Growth: Evidence from Korea," Sustainability, MDPI, vol. 11(6), pages 1-17, March.
    16. Jean-Louis Paré & Frédéric Demerens, 2011. "Détecter les manipulations financières en France : Le cas d'une PME cotée sur Alternext," Post-Print hal-00650559, HAL.
    17. Min Park, 2021. "Unionized employees’ influence on executive compensation: Evidence from Korea," British Journal of Industrial Relations, London School of Economics, vol. 59(4), pages 1049-1083, December.
    18. Goldman, Eitan & Slezak, Steve L., 2006. "An equilibrium model of incentive contracts in the presence of information manipulation," Journal of Financial Economics, Elsevier, vol. 80(3), pages 603-626, June.
    19. Mercedes Rodríguez-Fernández & Ana I. Gaspar-González & Eva M. Sánchez-Teba, 2020. "Does Diversity in Top Management Teams Contribute to Organizational Performance? The Response of the IBEX 35 Companies," Social Sciences, MDPI, vol. 9(4), pages 1-16, March.
    20. Sun, Sophia Li & Habib, Ahsan & Huang, Hedy Jiaying, 2019. "Tournament incentives and stock price crash risk: Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 54(C), pages 93-117.

    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:gam:jsusta:v:11:y:2019:i:12:p:3421-:d:241802. 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: MDPI Indexing Manager (email available below). General contact details of provider: https://www.mdpi.com .

    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.