Abstract
Recent regulation and legislation, along with the growing influence of compensation consultants and proxy advisors, have led to an increase in performance-contingent awards. A majority of these awards contain performance conditions tied explicitly to accounting measures. Both the structure of the awards and the opaqueness of award disclosures can provide incentives for earnings management. Our examination reveals no evidence of earnings management through discretionary accruals. In contrast, we find evidence of real activities management. Earnings management varies with accounting metric type, award disclosure opaqueness, and proximity of earnings to performance thresholds. Results are robust to accounting for endogeneity in performance-contingent awards. Our evidence suggests that recent trends in the structure and transparency of pay affect both the incentives for managing earnings and the form of earnings management.
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