Abstract
Prior research has documented a positive association between chief executive officer (CEO) equity incentives and earnings management. We identify a firm's growth opportunity proxied by Book-to-Market ratio as an organizational environmental factor and use the panel threshold model to examine whether firm growth opportunity variable moderates this positive relation. Our results show that, for firms with relatively low growth potential, equity incentives motivate managers to manipulate earnings. However, as firm growth opportunities reach certain thresholds, equity pay can effectively mitigate the agency issue associated with earnings management. Finally, we find that our results still hold and become even more pronounced for the financial crisis period.
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