股权激励与盈余管理外文文献翻译2014年译文4500字

文献出处：Scott Duellman. Equity Incentives and Earnings Management[J].

Account. Public Policy ,2014(32):495–517.

原文

Equity Incentives and Earnings Management

Scott Duellmana Abstract

Prior studies suggest that equity incentives inherently have both an interest alignment effect and an opportunistic financial reporting effect. Using three distinct proxies for earnings management we find evidence consistent with the incentive alignment (opportunistic financial reporting) effect of equity incentives increasing as monitoring intensity increases (decreases). Furthermore, using the accrual-based earnings management and meet/beat analyst forecast models we find that the opportunistic financial reporting effect of equity incentives dominates the incentive alignments effect for firms with low monitoring intensity. Using proxies for real earnings management, we find that the incentive alignment effect dominates the opportunistic financial reporting effect for high and moderate monitoring intensity firms. However, for low monitoring intensity firms the opportunistic reporting effect mitigates, but does not completely offset, the benefits of the incentive alignment effect. Overall, these findings are

consistent with the level of monitoring affecting the relation between equity incentives and earnings management. 1. Introduction

Classical agency theory suggests that equity incentives align

’’managers

interests

with

shareholders

interests

(see

for

example, Mirlees, 1976, Jensen and Meckling, 1976 and Holmstrom, 1979). However, recent theoretical papers suggest that equity incentives may also motivate managers to boost short term stock prices by manipulating accounting

numbers

(see

for

example, Bar-Gill

and

Bebchuk,

2003 and Goldman and Slezak, 2006). Empirical studies examining the effect of equity incentives on earnings management, a proxy for opportunistic reporting, yield mixed results. For example, Gao and Shrieves, 2002,Bergstresser and Philippon, 2006 and Weber, 2006, and Cornett et al. (2008) document a positive relation between equity incentives and accrual-based earnings management; while Hribar and Nichols (2007) find that after controlling for cash flow volatility the relation between equity incentives and earnings management becomes insignificant.1 Furthermore, Cohen et al. (2008) find a negative relation between equity incentives and real earnings management. Thus, whether equity incentives are associated with opportunistic financial reporting is an open empirical question that warrants further study.

We view equity incentives as one element of the firm

’s governance

structure and argue that equity incentives inherently have both an interest alignment effect and an opportunistic financial reporting effect. We investigate how the relation between equity incentives and earnings

’management changes with respect to the intensity of firms

monitoring

systems. More specifically, we expect that when monitoring intensity is relatively high, equity incentives will have more of an incentive alignment effect leading to lower earnings management in comparison with low monitoring intensity firms. Conversely, when monitoring intensity is relatively low, equity incentives will have more of an opportunistic financial reporting effect leading to higher earnings management in comparison to high monitoring intensity firms. Thus, we predict that the incentive alignment (opportunistic financial reporting) effect of equity incentives increases as monitoring intensity increases (decreases).

Using a sample over the time period 2001–2007, we proxy for earnings management using three different measures common in the literature: (i) absolute abnormal accruals, (ii) real earnings management measures, and (iii) the likelihood of meeting/beating an analyst forecast. We measure equity incentives, in a manner consistent with prior studies such as Bergstresser and Philippon (2006) as the percentage of total CEO compensation for the year that would come from a 1% increase in the companys stock as of the end of the previous fiscal year.

To measure the intensity of monitoring mechanisms, we focus on three

’financial reporting decisions (board of directors, external auditors, and institutional investors). We identify six board characteristics, one auditor characteristic, and two institutional investor characteristics that could potentially affect monitoring effectiveness. Using principal component analysis we collapse these nine characteristics into two monitoring intensity measures (principal components) which capture 51.1% of the variance in these characteristics.2 We classify firms as high (low) monitoring intensity firms if both monitoring intensity measures are above (below) median values while firms with only one monitoring factor above the median are classified as moderate monitoring intensity firms. We use this approach as different monitoring attributes may be substitutes or complements to one another and principal component analysis effectively reduces the redundancy in these variables.

We regress our measures of earnings management on lagged equity incentives, monitoring intensity classifications (moderate and low), the interaction between them, and a set of control variables. Our findings can be summarized as follows. First, we find evidence consistent with the incentive alignment (opportunistic financial reporting) effect of equity incentives increasing as monitoring intensity increases (decreases) across all three earnings management measures. Second, in tests using accrual based earnings management and meet/beat analyst forecasts, we find that for

’mechanisms that are most directly involved in monitoring managers

low monitoring intensity firms, the opportunistic reporting effect dominates the incentive alignment effect of equity incentives; and equity incentives and earnings management are unrelated when monitoring intensity is moderate or high.

Third, with respect to real earnings management, we find a negative relation between equity incentives and real earnings management for high and moderate monitoring intensity firms. Furthermore, for low intensity monitoring firms the negative relation is mitigated, but not completely offset, by the incentive alignment effect. In contrast with our abnormal accrual results, these findings suggest that the incentive alignment effect dominates the opportunistic financial reporting effect with respect to real earnings management. A potential explanation for these findings is that both monitors and managers are aware of the higher potential long-term costs of real earnings management and thus tend to avoid cuts to discretionary expenses (research and development) or increase production.

Our primary contribution to the literature on the relation between equity incentives and earnings management is that we provide evidence on how this relation varies with the level of oversight by monitoring mechanisms. This is in contrast with most prior studies in this area that either overlook the effects of monitoring (or governance) mechanisms or simply use one or more governance characteristics as control variables (Bergstresser and Philippon, 2006 and Cornett et al., 2008).3

However, a prior study by Weber (2006) also investigates the effects of governance on the relation between CEO wealth sensitivity and earnings management using a random sample of 410 S&P 1500 firms. Weber (2006) finds that CEO wealth sensitivity is positively related to abnormal accruals and that governance does not significantly affect this relation. Weber (2006) defines monitoring intensity by only using the factor that explains the most variance from the principle component analysis. However, this methodology could misclassify firms because monitoring has multiple dimensions and using only one factor ignores the presence of substitutive monitoring mechanisms. Furthermore, in contrast to Weber (2006), using two monitoring intensity factors, we find that monitoring intensity has a significant effect on the relation between equity incentives and earnings management. Additionally, our study uses a broader sample of firms, a longer sample period, and multiple proxies for earnings management.

In addition to our primary contribution, we add to the literature in two ways. First, while prior studies on equity incentives and accrual-based earnings management document that the results are dependent on controlling for operating cash flow volatility, we show that for firms with low monitoring, equity incentives are positively related to accrual-based earnings management even after controlling for operating cash flow volatility. Second, we add to the literature by providing evidence on the

effects of monitoring intensity on the relation between equity incentives and real earnings management. To our knowledge, the only other study that investigates the relation between equity incentives and real earnings management is Cohen et al. (2008).4However, Cohen et al. (2008) do not consider the mitigating effects of monitoring intensity on this relation.

An important limitation of our study (and other work in this area more generally) is that equity incentives and other governance mechanisms are likely to be chosen endogenously with the firm

’s other corporate policies,

structures, and features. Thus, while we attempt to mitigate the effects of endogeneity, we cannot definitively rule out the possibility that our results could be affected by endogeneity bias.

The

remainder

of

this

paper

is

organized

as

follows.

Section 2 presents a discussion of prior research and our hypothesis development. Section 3 presents our research design choices and their rationale. The evidence is presented in Section 4 and the conclusion in Section 5.

2. Prior research and hypothesis development 2.1. Prior research

Equity incentives are an important part of firmsstructures that are used to align managers

’’ governance

interests with shareholder

interests (Mirlees, 1976, Jensen and Meckling, 1976 and Holmstrom, 1979). However, recent studies suggest that they also motivate managers to

focus on boosting stock price in the short term (see for example, Bar-Gill and Bebchuk, 2003 and Goldman and Slezak, 2006).

Prior studies document mixed evidence on the effect of equity incentives on earnings management. On the one hand, Gao and Shrieves, 2002, Cheng

and

Warfield,

2005, Bergstresser

and

Philippon,

2006 and Weber, 2006, and Cornett et al. (2008) find that equity incentives are positively related to the absolute value of abnormal accruals. On the other hand, Hribar and Nichols (2007) demonstrate that findings of earnings management in studies that are based on absolute abnormal accruals no longer hold once controls for cash flow volatility are added. Furthermore, in contrast with studies documenting opportunistic effects of equity incentives, Cohen et al. (2008) find a negative relation between real earnings management methods and stock ownership, CEO bonuses, and unexercisable options consistent with incentive alignment effects dominating opportunistic effects. Armstrong et al. (2010a, 226) summarize the findings on the relation between equity incentives and accounting irregularities of all types (including accrual based earnings management) by stating that literature.

”“no conclusive results have emerged from the

Thus, whether equity incentives result in earnings

management remains an open question.

2.2. Equity incentives and other governance mechanisms

We view equity incentives as one element of a firm

’s overall governance

structure. Furthermore, we note that equity incentives have both an incentive alignment effect as well as an opportunistic financial reporting effect. The incentive alignment effect follows from agency theory which suggests that managerial stock ownership align their interests with shareholders (Jensen and Meckling, 1976). The opportunistic financial reporting effect arises because managers with high equity incentives are motivated to overstate accounting performance and boost stock prices in the short-run. For example, Bar-Gill and Bebchuk (2003) show that when managers can sell shares in the short-run, they will be motivated to misreport performance and misreporting will be an increasing function of the fraction of management-owned shares that could be sold (also see Goldman and Slezak, 2006 and Ronen et al., 2006).

If firms choose their governance structures to maximize value, and optimally use equity incentives in conjunction with other governance mechanisms, there will be either a negative relation or no relation between equity incentives and earnings management. Intuitively, any opportunistic effects of equity incentives would be exactly offset by other governance or monitoring mechanisms. However, adjusting governance structures is costly so it is unclear whether most firms end up with optimal equity incentives and monitoring mechanisms in a dynamic environment. Deviations from optimal monitoring raises the possibility that under some conditions the opportunistic effects of equity incentives may dominate or mitigate the

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