Impact of managerial incentive structure on operating asymmetries and accruals

Abstract

AbstractPrior literature acknowledges that, despite its importance in accounting research and practice, there is little understanding of how accruals (i.e., non‐cash component of earnings) behave. To extend the literature on the complex behavior of accruals, this study examines how the asymmetric behavior of accruals is affected by managerial incentive structure. Built upon the agency theory, this study predicts that the “reverse” asymmetric behavior of accruals (i.e., being more sensitive to sales decreases than to sales increases) is mitigated (amplified) when the incentive structure for CEOs relies relatively more on short‐term cash bonus (long‐term incentives). The empirical results based on a sample of 26,183 firm‐year observations for S&P 1500 companies are highly consistent with the prediction.