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Ex Ante Severance Agreements and Earnings Management

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  • Kareen E. Brown

Abstract

This research studies whether severance agreements may reduce fraudulent earnings management, and whether severance pay mitigates executives’ career concerns. In a sample of large U.S. firms, those with higher severance pay are less likely to be subject to accounting and auditing enforcement releases (AAERs) by the U.S. Securities and Exchange Commission (SEC). Among S&P 500 firms in the post†SOX period with premanaged earnings below analyst forecasts, firms with higher severance pay are less likely to meet/beat the analyst forecast using abnormal accruals. Overall, these results suggest that fear of losing a lucrative severance package, and/or the insurance offered by such a package curbs earnings management.

Suggested Citation

  • Kareen E. Brown, 2015. "Ex Ante Severance Agreements and Earnings Management," Contemporary Accounting Research, John Wiley & Sons, vol. 32(3), pages 897-940, September.
    • Handle: RePEc:wly:coacre:v:32:y:2015:i:3:p:897-940
    DOI: 10.1111/1911-3846.12103
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    Cited by:

    1. Peng, Qiyuan & Yin, Sirui, 2021. "Does the executive labor market discipline? Labor market incentives and earnings management," Journal of Empirical Finance, Elsevier, vol. 62(C), pages 62-86.
    2. Hongkang Xu & Mai Dao & Jia Wu, 2019. "The effect of local political corruption on earnings quality," Review of Quantitative Finance and Accounting, Springer, vol. 53(2), pages 551-574, August.
    3. Wang Dong & Hongling Han & Yun Ke & Kam C. Chan, 2018. "Social Trust and Corporate Misconduct: Evidence from China," Journal of Business Ethics, Springer, vol. 151(2), pages 539-562, August.

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