Stock Option Compensation and Earnings Management Incentives

Terry Baker, Denton Collins, Austin Reitenga

Research output: Contribution to journalReview article

67 Scopus citations

Abstract

We examine whether the structure of executive compensation, specifically stock options relative to other forms of pay, is associated with opportunistic use of discretionary accruals in reported earnings. Prior research suggests that using options creates an incentive to temporarily depress the firm’s stock price prior to the option award date, thereby lowering the exercise price of the options. We hypothesize, and find evidence, that relatively high option compensation is associated with income-decreasing discretionary accrual choices in periods leading up to option award dates. Furthermore, we find that this association is stronger when managers are able to publicly announce earnings prior to the option award date. Our results are consistent with the general implication from prior research that option compensation creates opportunistic incentives for managers to time the release of good and bad news to the market.

Original languageEnglish
Pages (from-to)557-582
Number of pages26
JournalJournal of Accounting, Auditing & Finance
Volume18
Issue number4
DOIs
StatePublished - Oct 2003

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