Managerial Ownership and Earnings Management: Evidence from Stock Ownership Plans

Abstract

Stock ownership plans initiate stock ownership requirements for executives, but some plans do not require executives to increase their ownership to meet plan requirements. The initiation of ownership requirements, combined with differences between plans in the ownership requirements of executives, provides a novel setting to disentangle the risk and reward effects of managerial ownership on earnings management. Consistent with the risk effect, adoption firms that require an ownership increase exhibit a decrease in the propensity to meet or just beat analyst EPS forecasts following plan adoption. The evidence of a decrease is robust to using adoption firms that require no ownership increase as a control sample, and the results are also robust to using a propensity score matched control sample.