One form of opportunistic behavior that managers exhibit is engaging in excessive product-market

  • Abarbanell, Jeffery, and Reuven Lehavy. (2003). Biased forecasts or biased earnings? The role of reported earnings in explaining apparent bias and over/underreaction in analysts’ earnings forecasts. Journal of Accounting and Economics 36 (1–3): 105–146. https://doi.org/10.1016/j.jacceco.2003.11.001.

  • Ahmed, A.S., E. Kilic, and G.J. Lobo. (2006). Does recognition versus disclosure matter? Evidence from value-relevance of banks' recognized and disclosed derivative financial instruments. The Accounting Review 81 (3): 567–588.

    Google Scholar 

  • Ai, C., and E.C. Norton. (2003). Interaction terms in logit and probit models. Economics Letters 80 (1): 123–129.

    Google Scholar 

  • Allen, E.J., P.M. Dechow, D.G. Pope, and G. Wu. (2017). Reference-dependent preferences: Evidence from marathon runners. Management Science 63 (6): 1657–1672.

    Google Scholar 

  • Alsheimer, A. (2006). Assessing corporate America’s opposition to the FASB’s new stock options expensing policy. Entrepreneurial Business Law Journal 1 (1): 43–61.

    Google Scholar 

  • Angrist, J.D., and J.-S. Pischke. (2008). Mostly harmless econometrics: An empiricist's companion. Princeton Univers. Press.

    Google Scholar 

  • Armstrong, C.S., A.D. Jagolinzer, and D.F. Larcker. (2010). Chief executive officer equity incentives and accounting irregularities. Journal of Accounting Research 48 (2): 225–271.

    Google Scholar 

  • Armstrong, C.S., and R. Vashishtha. (2012). Executive stock options, differential risk-taking incentives, and firm value. Journal of Financial Economics 104 (1): 70–88.

    Google Scholar 

  • Armstrong, C.S., D.F. Larcker, G. Ormazabal, and D.J. Taylor. (2013). The relation between equity incentives and misreporting: The role of risk-taking incentives. Journal of Financial Economics 109 (2): 327–350.

    Google Scholar 

  • Ayers, B., J. Jiang, and E. Yeung. (2006). Discretionary accruals and earnings management: An analysis of pseudo earnings targets. The Accounting Review 81 (3): 617–652.

    Google Scholar 

  • Baker, T., D. Collins, and A. Reitenga. (2003). Stock option compensation and earnings management incentives. Journal of Accounting, Auditing & Finance 18 (4): 557–582.

    Google Scholar 

  • Bakke, T.E., H. Mahmudi, C.S. Fernando, and J.M. Salas. (2016). The causal effect of option pay on corporate risk management. Journal of Financial Economics 120 (3): 623–643.

    Google Scholar 

  • Ball, R., and P. Brown. (1968). An empirical evaluation of accounting income numbers. Journal of Accounting Research 6 (2): 159–178.

    Google Scholar 

  • Barth, M.E., G. Clinch, and T. Shibano. (2003). Market effects of recognition and disclosure. Journal of Accounting Research 41 (4): 581–609.

    Google Scholar 

  • Barth, M.E., I.D. Gow, and D.J. Taylor. (2012). Why do pro forma and street earnings not reflect changes in GAAP? Evidence from SFAS 123R. Review of Accounting Studies 17 (3): 526–562.

    Google Scholar 

  • Bartov, E., D. Givoly, and C. Hayn. (2002). The rewards to meeting or beating earnings expectations. Journal of Accounting and Economics 33 (2): 173–204.

    Google Scholar 

  • Bartov, E., and P. Mohanram. (2004). Private information, earning manipulations, and executive stock-option exercises. The Accounting Review 79 (4): 889–920.

    Google Scholar 

  • Bauman, M.P., M. Braswell, and K.W. Shaw. (2005). The numbers game: How do managers compensated with stock options meet analysts' earnings forecasts? Research in Accounting Regulation 18 (1): 3–28.

    Google Scholar 

  • Baumann, M.P., and K.W. Shaw. (2006). Stock option compensation and the likelihood of meeting analysts’ quarterly earnings targets. Review of Quantitative Finance and Accounting 26 (3): 301–319.

    Google Scholar 

  • Beaver, W., M. McNichols, and K. Nelson. (2007). An alternative interpretation of the discontinuity in earnings distributions. Review of Accounting Studies 12 (4): 525–556.

    Google Scholar 

  • Bergstresser, D., and T. Philippon. (2006). CEO incentives and earnings management. Journal of Financial Economics 80 (3): 511–529.

    Google Scholar 

  • Bettis, J., J. Coles, and M. Lemmon. (2000). Corporate policies restricting trading by insiders. Journal of Financial Economics 57 (2): 191–220.

    Google Scholar 

  • Bissessur, S.W., and D. Veenman. (2016). Analyst information precision and small earnings surprises. Review of Accounting Studies 21 (4): 1327–1360.

    Google Scholar 

  • Bradshaw, M., G. Miller, Serafeim, G. (2011). Accounting method heterogeneity and analysts' forecast errors, Working Paper.

  • Brown, K. (2002). Questioning the books: Tweaking results is hardly a sometime thing - many firms, under diverse pressures, may play with numbers. Wall Street Journal, February 6, C1.

  • Brown, L.D., and Y.-J. Lee. (2011). Changes in option-based compensation around the issuance of SFAS 123R. Journal of Business Finance & Accounting 38 (9): 1053–1095.

    Google Scholar 

  • Burgstahler, D.C., and I. Dichev. (1997). Earnings management to avoid earnings decreases and losses. Journal of Accounting and Economics 24 (1): 99–126.

    Google Scholar 

  • Burgstahler, D.C., and M.J. Eames. (2003). Earnings management to avoid losses and earnings decreases: Are analysts fooled? Contemporary Accounting Research 20 (2): 253–294.

    Google Scholar 

  • Burgstahler, D.C., and M.J. Eames. (2006). Management of earnings and analysts’ forecasts to achieve zero and small positive earnings surprise. Journal of Business Finance and Accounting 33 (5–6): 633–652.

    Google Scholar 

  • Burns, N., and S. Kedia. (2006). The impact of performance-based compensation on misreporting. Journal of Financial Economics 79 (1): 35–67.

    Google Scholar 

  • Carter, M.E., L.J. Lynch, and S.L.C. Zechman. (2009). Changes in bonus contracts in the post-Sarbanes-Oxley era. Review of Accounting Studies 14 (4): 480–506.

    Google Scholar 

  • Cheng, Q., and T.D. Warfield. (2005). Equity incentives and earnings management. The Accounting Review 80 (2): 441–476.

    Google Scholar 

  • Chu, J., P.M. Dechow, K.W. Hui, and A.Y. Wang. 2019. Maintaining a reputation for consistently beating earnings expectations and the slippery slope to earnings manipulation. Contemporary Accounting Research 36 : 1966–1998. https://doi.org/10.1111/1911-3846.12492.

  • Cohen, D.A., A. Dey, and T.Z. Lys. (2008). Real and accrual-based earnings management in the pre- and post-sarbanes-oxley periods. The Accounting Review 83 (3): 757–787.

    Google Scholar 

  • Coles, J.L., N.D. Daniel, and L. Naveen. (2006). Managerial incentives and risk-taking. Journal of Financial Economics 79 (2): 431–468.

    Google Scholar 

  • Curtis, A.B., R.J. Lundholm, and S.E. McVay. (2014). Forecasting sales: A model and some evidence from the retail industry. Contemporary Accounting Research 31 (2): 581–608.

    Google Scholar 

  • Dechow, P. M., A. P. Hutton, and R. G. Sloan. (1996a). Economic consequences of accounting for stock-based compensation. Journal of accounting research 34 (studies on recognition, measurement, and disclosure issues in accounting): 1–20.

  • Dechow, P.M., R.G. Sloan, and A.P. Sweeney. (1996b). Causes and consequences of earnings manipulation: An analysis of firms subject to enforcement actions by the SEC. Contemporary Accounting Research 13 (1): 1–36.

    Google Scholar 

  • Dechow, P.M., S. Richardson, and I. Tuna. (2003). Why are earnings kinky? An examination of the earnings management explanation. Review of Accounting Studies 8 (2): 355–384.

    Google Scholar 

  • Dechow, P. M., and C. Schrand. (2004). Earnings quality. The Research Foundation of CFA Institute. Charlottesville, Virginia.

  • DeFranco, G., S.P. Kothari, and R. Verdi. (2011). The benefits of financial statement comparability. Journal of Accounting Research 49 (4): 895–931.

    Google Scholar 

  • Degeorge, F., J. Patel, and R. Zeckhauser. (1999). Earnings management to exceed thresholds. Journal of Business 72 (1): 1–35.

    Google Scholar 

  • Denis, D.J., P. Hanouna, and A. Sarin. (2006). Is there a dark side to incentive compensation? Journal of Corporate Finance 12 (3): 467–488.

    Google Scholar 

  • Dhaliwal, D., C. Gleason, and L. Mills. (2004). Last chance earnings management: Using the tax expense to achieve earnings targets. Contemporary Accounting Research 21 (2): 430–459.

    Google Scholar 

  • Doyle, Jeffrey T., Jared N. Jennings, and Mark T. Soliman. 2013. Do managers define non-GAAP earnings to meet or beat analyst forecasts? Journal of Accounting and Economics 56 (1): 40–56. https://doi.org/10.1016/j.jacceco.2013.03.002.

  • Durtschi, C., and P. Easton. (2005). Earnings management? The shapes of the frequency distributions of earnings metrics are not evidence ipso facto. Journal of Accounting Research 43 (4): 557–592.

    Google Scholar 

  • Durtschi, C., and P. Easton. (2009). Earnings management? Erroneous inferences based on earnings frequency distributions. Journal of Accounting Research 47 (5): 1249–1281.

    Google Scholar 

  • Edmans, A., V.W. Fang, and K.A. Lewellen. (2017). Equity vesting and investment. Review of Financial Studies 30 (7): 2229–2271.

    Google Scholar 

  • Edmans, A., and X. Gabaix. (2015). Executive compensation: A modern primer. Working paper 21131, National Bureau of economic research. Available at: http://www.nber.org/papers/ w21131.

  • Efendi, J., A. Srivastava, and E.P. Swanson. (2007). Why do corporate managers misstate financial statements? The role of option compensation and other factors. Journal of Financial Economics 85 (3): 667–708.

    Google Scholar 

  • Entwistle, G.M., G.D. Feltham, and C. Mbagwu. (2006). Financial reporting regulation and the reporting of pro forma earnings. Accounting Horizons 20 (1): 39–55.

    Google Scholar 

  • Erickson, M., M. Hanlon, and E.L. Maydew. (2006). Is there a link between executive equity incentives and accounting fraud? Journal of Accounting Research 44 (1): 113–143.

    Google Scholar 

  • Ertimur, Y., F. Ferri, and D.A. Maber. (2012). Reputation penalties for poor monitoring of executive pay: Evidence from option backdating. Journal of Financial Economics 104 (1): 118–144.

    Google Scholar 

  • Fama, E.F. (1980). Agency problems and the theory of the firm. The Journal of Political Economy 88 (2): 288–307.

    Google Scholar 

  • Feroz, E. H., K. Park, and V. S. Pastena. (1991). The financial and market effects of the SEC’s accounting and auditing enforcement releases. Journal of accounting research 20 (Suppl.): 107–142.

  • Feng, M., C. Li, and S. McVay. (2009). Internal control and management guidance. Journal of Accounting and Economics 48 (2): 190–209.

    Google Scholar 

  • Feng, M., W. Ge, S. Luo, and T. Shevlin. (2011). Why do CFOs become involved in material accounting manipulations? Journal of Accounting and Economics 51 (1): 21–36.

    Google Scholar 

  • Feng, M., and S. McVay. (2010). Analysts’ incentives to overweight management guidance when revising their short-term earnings forecasts. The Accounting Review 85 (5): 1617–1646.

    Google Scholar 

  • Ferri, F., and N. Li. (2018). Does option-based compensation affect payout policy? Evidence from FAS123R. Journal of Financial and Quantitative Analysis forthcoming.

  • Frank, K. (2000). Impact of a confounding variable on a regression coefficient. Sociological Methods & Research 29 (2): 147–194.

    Google Scholar 

  • Frydman, C., and D. Jenter. (2010). CEO compensation. Annual Review of Financial Economics 2 (1): 75–102.

    Google Scholar 

  • Gao, P., and R. E. Shrieves. (2002). Earnings management and executive compensation: A case of overdose of option and underdose of salary? Workings Paper, University of Tennessee.

  • Graham, J.R., C.R. Harvey, and S. Rajgopal. (2005). The economic implications of corporate financial reporting. Journal of Accounting and Economics 40: 3–73.

    Google Scholar 

  • Greene, W. (2010). Testing hypotheses about interaction terms in nonlinear models. Economics Letters 107 (2): 291–296.

    Google Scholar 

  • Greenspan, A. (2002). Federal Reserve Board's semiannual monetary policy report to the congress - before the committee on banking, housing, and Urban Affairs, U.S. Senate July 16, 2002. Available at: https://www.federalreserve.gov/boarddocs/hh/2002/july/testimony.htm.

  • Guay, W.R. (1999). The sensitivity of CEO wealth to equity risk: An analysis of the magnitude and determinants. Journal of Financial Economics 53 (1): 43–71.

    Google Scholar 

  • Gunny, Katherine A. 2010. The relation between earnings management using real activities manipulation and future performance: Evidence from meeting earnings benchmarks*. Contemporary Accounting Research 27 (3): 855–888. https://doi.org/10.1111/j.1911-3846.2010.01029.x.

  • Hall, B.J., and K.J. Murphy. (2002). Stock options for undiversified executives. Journal of Accounting and Economics 33 (1): 3–42.

    Google Scholar 

  • Haugen, R.A., and L.W. Senbet. (1981). Resolving the agency problems of external capital through options. The Journal of Finance 36 (3): 629–647.

    Google Scholar 

  • Hayes, R.M., M. Lemmon, and M. Qiu. (2012). Stock options and managerial incentives for risk taking: Evidence from FAS 123R. Journal of Financial Economics 105 (1): 174–190.

    Google Scholar 

  • Hayn, C. (1995). The information content of losses. Journal of Accounting and Economics 20 (2): 125–153.

    Google Scholar 

  • Heron, R.A., and E. Lie. (2007). Does backdating explain the stock price pattern around executive stock option grants? Journal of Financial Economics 83 (2): 271–295.

    Google Scholar 

  • Jacob, J., and B. Jorgensen. (2007). Earnings management and accounting income aggregation. Journal of Accounting and Economics 43 (2–3): 369–390.

    Google Scholar 

  • Jayaraman, S., and T. Milbourn. (2015). CEO equity incentives and financial misreporting: The role of auditor expertise. The Accounting Review 90 (1): 321–350.

    Google Scholar 

  • Jensen, M.C., and W.H. Meckling. (1976). Theory of the firm: Managerial behaviour, agency costs, and ownership structure. Journal of Financial Economics 3 (4): 305–360.

    Google Scholar 

  • Jensen, M.C. (2005). Agency costs of overvalued equity. Financial Management 34 (1): 5–19.

    Google Scholar 

  • Jiang, J.X., K.R. Petroni, and I.Y. Wang. (2010). CFOs and CEOs: Who have the most influence on earnings management? Journal of Financial Economics 96 (3): 513–526.

    Google Scholar 

  • Jochem, T., T. Ladika, and Z. Sautner. (2018). The retention effects of unvested equity: Evidence from accelerated option vesting. The Review of Financial Studies 31 (11): 4142–4186.

    Google Scholar 

  • Johnson, S. A., H. E. Ryan Jr., and Y. S. Tian. (2003). Executive compensation and corporate fraud. Available at: http://ssrn.com/abstract=395960.

  • Karpoff, J., D.S. Lee, and G.S. Martin. (2008). The cost to firms of cooking the books. Journal of Financial and Quantitative Analysis 43 (3): 581–611.

    Google Scholar 

  • Kasznik, R., and B. Lev. (1995). To warn or not to warn: Management disclosures in the face of an earnings surprise. The Accounting Review 70 (1): 113–134.

    Google Scholar 

  • Kasznik, R., and M. McNichols. (2002). Does meeting earnings expectations matter? Evidence from analyst forecast revisions and share prices. Journal of Accounting Research 40 (3): 727–759.

    Google Scholar 

  • Ke, B. (2001). Why do CEOs of publicly traded firms prefer reporting small increases in earnings and long strings of consecutive earnings increases? Available at: http://ssrn.com/abstract=250308.

  • Kile, C.O., and M.E. Phillips. (2009). Using industry classification codes to sample high-technology firms: Analysis and recommendations. Journal of Accounting, Auditing & Finance 24 (1): 35–58.

    Google Scholar 

  • Knowledge@Wharton. (2003). Stock options: The end of the affair? (July 30).

  • Ladika, T., and Z. Sautner. (2020). Managerial short-termism and investment: Evidence from accelerated option vesting. Review of Finance 24 (2): 305–344.

    Google Scholar 

  • Lambert, R.A., D.F. Larcker, and R.E. Verrecchia. (1991). Portfolio considerations in valuing executive compensation. Journal of Accounting Research 29 (1): 129–149.

    Google Scholar 

  • Levitt, A. (1998). The numbers game. Remarks delivered at the NYU Center for law and business, September 28, New York, NY.

  • Lie, E. (2005). On the timing of CEO stock option awards. Management Science 51 (5): 802–812.

    Google Scholar 

  • Lopez, T., and L. Rees. (2002). The effect of beating and missing analysts’ forecasts on the information content of unexpected earnings. Journal of Accounting, Auditing, and Finance 17 (2): 155–184.

    Google Scholar 

  • Matsumoto, Dawn A. 2002. Management’s incentives to avoid negative earnings surprises. The Accounting Review 77 (3): 483–514. http://www.jstor.org/stable/3068885. Accessed 7 Sept 2021.

  • McAnally, M.L., A. Srivastava, and C.D. Weaver. (2008). Executive stock options, missed earnings targets, and earnings management. The Accounting Review 83 (1): 185–216.

    Google Scholar 

  • McConnell, P., J. Pegg, D. Mott, and C. Senyek. (2004). FASB does it: FAS 123(R) requires stock option expensing. Bear Stearns & Co..

    Google Scholar 

  • McConnell, P., J. Pegg, C. Senyek, D. Mott, and A. Calingsan. (2006). Primer on accounting for stock-based compensation: Stock options, restricted stock, and stock appreciation rights. Bear Stearns & Co..

    Google Scholar 

  • McVay, S., V. Nagar, and V.W. Tang. (2006). Trading incentives to meet the analyst forecast. Review of Accounting Studies. 11 (4): 575–598.

    Google Scholar 

  • Murphy, K.J. (1999). Executive compensation. In Handbook of labor economics, ed. O. Ashenfleters and D. Card. North Holland.

    Google Scholar 

  • Norton, E.C., H. Wang, and C. Ai. (2004). Computing interaction effects and standard errors in logit and probit models. The Stata Journal 4 (2): 154–167.

    Google Scholar 

  • O’Connor, J.P., R.L. Priem, J.E. Coombs, and K.M. Gilley. (2006). Do CEO stock options prevent or promote fraudulent financial reporting? Academy of Management Journal 49 (3): 483–500.

    Google Scholar 

  • Palmrose, Z.-V., V.J. Richardson, and S. Scholz. (2004). Determinants of market reactions to restatement announcements. Journal of Accounting and Economics 37 (1): 59–89.

    Google Scholar 

  • Peng, L., and A. Röell. (2008). Executive pay and shareholder litigation. Review of Finance 12: 141–184.

    Google Scholar 

  • Phillips, J., M. Pincus, and S. Rego. (2003). Earnings management: New evidence based on deferred tax expense. The Accounting Review 78 (2): 491–521.

    Google Scholar 

  • Quinn, P. (2018). Shifting corporate culture: Executive stock ownership plan adoptions and incentives to meet or just beat analysts' expectations. Review of Accounting Studies 23 (2): 654–685.

    Google Scholar 

  • Roberts, M. R., and T. M. Whited. (2013). Endogeneity in empirical corporate finance, in George M. Constantinides, Miltron Harris, and Rene M. Stulz., eds. Handbook of the economics of finance. Vol 2A: 493–572.

  • Roe, J., and K. Papadopoulos. (2019). 2019 U.S. executive compensation trends. Harvard law school forum on corporate governance, https://corpgov.law.harvard.edu/2019/04/16/2019-u-s-executive-compensation-trends/.

  • Ross, S.A. (2004). Compensation, incentives, and the duality of risk aversion and riskiness. The Journal of Finance 59 (1): 207–225.

    Google Scholar 

  • Roychowdhury, S. (2006). Earnings management through real activities manipulation. Journal of Accounting and Economics 42 (2): 335–370.

    Google Scholar 

  • Schipper, K. (1991). Analysts’ forecasts. Accounting Horizons 5 (4): 105–121.

    Google Scholar 

  • Senyek, C., J. Pegg, D. Mott, and A. Calingasan. (2007). Consensus estimates exclude stock based compensation expense for 32% of NASDAQ 100 companies. Bear Stearns Equity Research.

  • Skinner, D., and R. Sloan. (2002). Earnings surprises, growth expectations, and stock returns or don’t let an earnings torpedo sink your portfolio. Review of Accounting Studies 7 (2): 289–312.

    Google Scholar 

  • Smith, C.W., and R.M. Stulz. (1985). The determinants of firms’ hedging policies. Journal of Financial and Quantitative Analysis 20 (4): 391–405.

    Google Scholar 

  • Stein, J.C. (1989). Efficient capital markets, inefficient firms: A model of myopic corporate behaviour. The Quarterly Journal of Economics 104 (4): 655–669.

    Google Scholar 

  • Trueman, B., F. Wong, and X. Zhang. (2001). Back to basics: Forecasting the revenues of internet firms. Review of Accounting Studies 6 (2–3): 305–329.

    Google Scholar 

  • Wall Street Journal. (2002). In a key change, Coke to treat stock options as compensation. (July 15).

  • Yermack, D. (1997). Good timing: CEO stock option awards and company news announcements. The Journal of Finance 52 (2): 449–475.

    Google Scholar 


Page 2

From: Executive equity incentives and opportunistic manager behavior: new evidence from a quasi-natural experiment

  Firm-years
Intersection of Compustat/CRSP/I/B/E/S/Execucomp, 2002–2007 8,145
Less:  
Financial institutions and utility sector firms −2,137
Missing variables −1,455
Firms without observations in both the pre- and post-event periods −383
Fewer than five analysts following the firm −914
Final sample 3,256

  1. This table summarizes the sample selection process.