The Impact of CEO Career Concerns on Accruals Based and Real Earnings Management
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The point of our study is to investigate, using both theoretical and archival empirical methods, the role of CEO career concerns as a determinant of earnings management behavior. The significance of earnings management in market economies is well documented. Our investigations are motivated by the disconnect between recent survey evidence documenting that executives prioritize implicit contracting (i.e., labor market) concerns when making earnings management decisions (Graham et al (2005)) and the extant academic literature's focus on explicit contracting explanations. We ¯rst develop a model of earnings management, rooted in career concerns, that alternatively incorporates the features of the accrual accounting performance measurement system and the negative value-destroying e®ects of real activities earnings management. Our model leads to the surprising prediction that, absent explicit compensation contracts, managers do not engage in income-increasing earnings management early in their careers. By contrast, later career stage CEOs are \trapped" into managing earnings upward even though the market correctly foresees this classic type of \signal jamming." Consistent with this, we present robust new empirical evidence that CEO age is a statistically and economically significant determinant of real activities and accruals-based earnings management levels. After numerous robustness tests to discrimi- nate between our hypothesis and alternative explanations for the significance of CEO age, we conclude that implicit career stage incentives are important determinants of corporate earnings management. Our findings are consistent with executives' self-insights regarding their behavior, while also suggesting that CEO age may be a signifcant correlated omitted variable in prior academic earnings management studies.
The article of record as published may be located at http://dx.doi.org/10.2139/ssrn.1716535
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Demers, Elizabeth; Wang, Chong (2013-08);Motivated by the disconnect between survey evidence documenting that executives prioritize implicit contracting (i.e., labor market based career concerns) when making earnings management decisions (Graham et al (2005)) ...
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