Abstract
We examine whether UK managers exploited the discretion provided in the UK GAAP to IFRS reconciliation process to manage earnings and whether this earnings management is associated with the structure of the managers’ compensation contracts. Using a comprehensive dataset, mainly hand-collected from the firms’ annual reports, we provide evidence that, given the existence of an accounting-related vesting target in their pay schemes, CEOs use UK GAAP to IFRS reconciliations as an earnings management tool. We test our hypotheses under a number of different specifications including a propensity score matching analysis. Our study contributes to the literature on the relation between earnings management and contractual incentives by focusing on a setting surrounding a major structural change in accounting policies.
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