The impact of CEO career concerns on accruals based and real earnings management
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This paper theoretically and empirically investigates the role of CEO career concerns on accruals based and real activities earnings management. We 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 effects of real activities earnings management choices. Our model leads to the surprising prediction that, absent explicit compensation contracts, managers who maximize lifetime compensation in a perfectly competitive labor market would have little incentive to engage in income-increasing accruals manipulation or real activities earnings management in the early stages of their careers. By contrast, mature executives are tapped into managing earnings upward in order to influence their post-retirement labor market value even though the market correctly foresees this type of “signal jamming”. Our empirical results support the hypotheses that younger managers engage in less accruals based and real earnings management than older CEOs, even after controlling for explicit compensation and wealth based incentives, as well as other factors that have been shown to be associated with earnings management. We also find evidence that younger managers choose the “lesser of two evils” by managing accruals rather than opting for value-destroying real activities earnings management choices.
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Demers, Elizabeth; Wang, Chong (Monterey, California: Naval Postgraduate School., 2010-11);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 ...
The Potential Misinterpretation Problem of Residual Based Models Due to Industry Misclassification Wang, Chong; Shao, Lili; Zhang, Chuan (MAG Scholar Marketing in Asia Group, 2017);Accounting researchers frequently employ industry-specific residual based models to draw inferences. Examples include discretionary accruals in Jones (1991) and modified Jones model (1995), and accruals quality in Francis ...
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)) ...