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Article: Substitution between Real and Accruals-Based Earnings Management after Voluntary Adoption of Compensation Clawback Provisions

TitleSubstitution between Real and Accruals-Based Earnings Management after Voluntary Adoption of Compensation Clawback Provisions
Authors
Issue Date2015
PublisherAmerican Accounting Association. The Journal's web site is located at http://aaapubs.aip.org/accr/
Citation
The Accounting Review, 2015, v. 90, p. 147-174 How to Cite?
AbstractTo deter financial misstatements, many companies have recently adopted compensation recovery policies—commonly known as ‘‘clawbacks’’—that authorize the board to recoup compensation paid to executives based on misstated financial reports. Clawbacks have been shown to reduce financial misstatements and increase investors’ confidence on earnings information. We show that the benefits come with an unintended consequence of certain firms substituting for accruals management with real transactions management (e.g., reduce research and development [R&D] expenditures), especially firms with strong incentives to achieve short-term earnings targets, such as firms with high growth or high transient institutional ownership. As such, the total amount of earnings management does not decrease subsequent to clawback adoption. We further show that although real transactions management temporarily boosts those clawback adopters’ short-term profitability and stock performance, this trend reverses after three years. In summary, clawbacks may have unexpected effects for a subset of firms whose managers are under greater pressure to meet earnings goals.
Persistent Identifierhttp://hdl.handle.net/10722/212060

 

DC FieldValueLanguage
dc.contributor.authorChan, LHL-
dc.contributor.authorChen, KCW-
dc.contributor.authorChen, TY-
dc.contributor.authorYu, Y-
dc.date.accessioned2015-07-21T02:21:10Z-
dc.date.available2015-07-21T02:21:10Z-
dc.date.issued2015-
dc.identifier.citationThe Accounting Review, 2015, v. 90, p. 147-174-
dc.identifier.urihttp://hdl.handle.net/10722/212060-
dc.description.abstractTo deter financial misstatements, many companies have recently adopted compensation recovery policies—commonly known as ‘‘clawbacks’’—that authorize the board to recoup compensation paid to executives based on misstated financial reports. Clawbacks have been shown to reduce financial misstatements and increase investors’ confidence on earnings information. We show that the benefits come with an unintended consequence of certain firms substituting for accruals management with real transactions management (e.g., reduce research and development [R&D] expenditures), especially firms with strong incentives to achieve short-term earnings targets, such as firms with high growth or high transient institutional ownership. As such, the total amount of earnings management does not decrease subsequent to clawback adoption. We further show that although real transactions management temporarily boosts those clawback adopters’ short-term profitability and stock performance, this trend reverses after three years. In summary, clawbacks may have unexpected effects for a subset of firms whose managers are under greater pressure to meet earnings goals.-
dc.languageeng-
dc.publisherAmerican Accounting Association. The Journal's web site is located at http://aaapubs.aip.org/accr/-
dc.relation.ispartofThe Accounting Review-
dc.titleSubstitution between Real and Accruals-Based Earnings Management after Voluntary Adoption of Compensation Clawback Provisions-
dc.typeArticle-
dc.identifier.emailChan, LHL: lchan@business.hku.hk-
dc.identifier.authorityChan, LHL=rp01048-
dc.identifier.doi10.2308/accr-50862-
dc.identifier.hkuros245722-
dc.identifier.volume90-
dc.identifier.spage147-
dc.identifier.epage174-

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