The association between CEO incentive rewards and earnings management: Do institutional features matter?
Abstract
Purpose
The purpose of this paper is to investigate whether or not there is a link between CEO incentive-based compensation and earnings management and to examine how institutional environment's features influence such link.
Design/methodology/approach
To test the predictions, the authors use a panel of 1,500 American, Canadian, British, and French firm-year observation over the period 2004-2008.
Findings
The authors find a significant association between earnings management and CEO incentive-based compensation. Moreover, the analysis provides evidence that institutional factors are strong determinants of this association. Specifically, the results show that firms from countries within the Anglo-American corporate governance model, which provides greater protection of shareholder rights, ensures strict enforcement of law, and scores high on board oversight, tend to have lower level of earnings management. The analysis shows however, that beside the formal corporate governance quality, it is relevant to consider weaker shareholder protection and lower law enforcement indexes to explain earnings management in firms from countries within the Euro-Continental corporate governance model.
Originality/value
This paper is the first to provide insights regarding the extent to which CEO incentive rewards imply management discretion and to indicate how much institutional features matter. The analysis contributes to two distinct strands of research. It extends prior research on the association between executive compensation and earnings management and adds to the literature demonstrating a relationship between institutional factors and financial decisions.
Keywords
Acknowledgements
The authors would like to thank the four anonymous reviewers, the Associate Editor Mike Useem and Editor-In-Chief Bill Judge, for insightful and very helpful comments during the review process. The authors are grateful for the comments from the participants at the Corporate Governance: AIR 20th's anniversary Conference on National Governance Bundles held at the Cambridge University Business School, September 28-29, 2012. The authors would like to thank their Institution, Faculty of Economic Sciences and Management, University of Sfax, for funding support.
Citation
Jouber, H. and Fakhfakh, H. (2014), "The association between CEO incentive rewards and earnings management: Do institutional features matter?", EuroMed Journal of Business, Vol. 9 No. 1, pp. 18-36. https://doi.org/10.1108/EMJB-11-2012-0019
Publisher
:Emerald Group Publishing Limited
Copyright © 2014, Emerald Group Publishing Limited