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1、 2010EQUITY INCENTIVES AND EARNINGS MANAGEMENTIN THE UNITED KINGDOMEquity incentives and earnings management in the United KingdomErasmus University RotterdamErasmus School of EconomicsRotterdam, 2010AuthorL.J.P. (John) de Vos (315695)CoachDr. Y. WangCo-readerDrs. R. van der Wal RAEquity incentives
2、and earnings management in the U.K.PrefaceThis thesis is written as the final assignment of my study Accounting, Auditing & Control at the Erasmus University of Rotterdam. While writing this thesis earnings management and the incentives for CEOs to engage in earnings management were of special inter
3、est to me. This period has come to an end with the conclusion of this thesis. First of all I want to thank my family and friends for their support during my master study. Secondly I would like to thank N. El-Haloush and R. van der Linden for their support and comments on my thesis. Finally I would l
4、ike to thank Dr. Y. Wang for her support and critical review while writing this thesis. John de VosRotterdam, 2010AbstractThe past two decades have shown an enormous increase in stock-based compensation. In the light of the credit crunch, the global financial crisis and the following economic recess
5、ion, variable compensation was a eyesore for a lot of people. Some companies even asked their employees to hand in their bonuses. This shows the importance of variable compensation in todays world. The use of stock-based compensation should make managers pay more attention to share price and should
6、provide better alignment between the stakeholders and the managers of a company. However, recent studies (e.g. OConnell and Brendan 2004) show that the incentives coming from variable compensation are not always the right ones. A possible issue is their incentive to engage in earnings management.Thi
7、s paper examines the relation between equity incentives and earnings management in the United Kingdom (U.K.). Three types of compensation (i.e. fixed salary, bonus and stock-based) are distinguished. Hypothesized is that fixed salary has a negative relation and that bonus and stock-based compensatio
8、n have a positive relation with discretionary accruals as a tool for earnings management. To test this, accrual and compensation data from FTSE listed firms is used. The accrual approach will be used in measuring earnings management and the relative size of the compensation types will be used to mea
9、sure the compensation variables.The results from this research show that fixed salary has a positive relationship with discretionary accruals. For bonus compensation no linear relationship with discretionary accruals is found and for stock-based compensation a negative relationship with discretionar
10、y accruals is found. Moreover, this research has proven that low equity incentive CEOs have significant higher mean scores of discretionary accruals than high equity incentive CEOs. Therefore, the results seem to oppose the results of studies from Bergstresser and Philippon (2006), Cheng and Warfiel
11、d (2005) and Gao and Shrieves (2002) who all found evidence that high equity incentive CEOs engage more in earnings management (through the use of discretionary accruals) than low equity incentive CEOs. Table of ContentsPreface3Abstract41Introduction71.1Problem statement71.2Research question81.3Cont
12、ribution91.4Literature91.5Sample and methods101.6Results112Literature review122.1Earnings management132.1.1What is earnings management?132.1.2How are earnings managed?142.1.3Why do firms engage in earnings management?162.1.4How to detect earnings management?182.2Compensation contracts232.2.1Fixed sa
13、laries242.2.2Short-term incentives242.2.3Long-term incentives252.2.4Why do managers receive stock compensation?252.3Earnings management and equity compensation263Hypotheses284Research design314.1Data and sample314.2Dependant variable324.3Independent variable325Data analysis and results325.1Discretio
14、nary accruals and descriptive statistics325.2Results325.2.1Correlation testing325.2.2Independent-Samples T-Test326Conclusion, limitations and future research326.1Research question326.2Theoretical and empirical conclusions326.3Limitations and directions for future research32References32Appendix A32Ap
15、pendix B32651 Introduction1.1 Problem statementStock-based compensation, like stock options and shares for example, has been frequently in the news the last couple of years. Despite the credit crunch, the global financial crisis and the following economic recession, a lot of companies, also financial institutions, gave their executives big bonuses. There were people who even argued that executives should hand in their bonuses, because they thought execut
