The asymmetric relation between earnings management behaviors: evidence from executive compensation incentives

Abstract

The purpose of this paper is to examine whether executive stock-based compensation incentives induce the relation between accrual-based earnings management (AEM) and real earnings management (REM) to become asymmetric. The empirical results show that there is the substitute relation between AEM and REM when CEOs have the lowest degree of stock-based compensation incentives. However, there is the complementary relation between AEM and REM when CEOs have the median degree of stock-based compensation incentives. Moreover, the results also present a trade-off relation exists in the highest degree financial incentives during the post-SOX period, but this relation does not exist in the same regime during the pre-SOX period. These findings provide new insight into executive compensation mechanism for shareholders, investors, and regulators, resulting in the efficiency to prevent managers from obtaining private gains at shareholders’ expense.