Ceo Incentives and Earnings Management

ARTICLE IN PRESS

Journal of Financial Economics 80 (2006) 511–529 www.elsevier.com/locate/jfec CEO incentives and earnings management$
Daniel Bergstressera,Ã, Thomas Philipponb a Harvard Business School, Boston MA 02163,USA
NYU Stern School of Business, New York, NY 10012,USA

b

Received 25 September 2003; accepted 13 October 2004
Available online 22 December 2005

Abtract
We provide evidence that the use of discretionary accruals to manipulate reported earnings is more pronounced at firms where the CEO’s potential total compensation is more closely tied to the value of stock and option holdings. In addition, during years of high accruals, CEOs exercise unusually large numbers of options and CEOs and other insiders sell large quantities of shares. r 2005 Elsevier B.V. All rights reserved.
JEL classification: G14; G34, M41
Keywords: Earnings management; Stock options; CEO compensation

1. Introduction
The past 15 years have seen an enormous increase in stock-based and optionbased executive compensation. The median exposure of CEO wealth to firm stock prices tripled between 1980 and 1994, and doubled again between 1994 and 2000
$
We are grateful for help from Mihir Desai, Wayne Guay, Brian Hall, Rema Hanna, Paul Gompers,
Dirk Jenter, Erik Lie, Joshua Rauh, Eddie Riedl, David Scharfstein, Aamer Sheikh, Jeremy Stein, Luigi
Zingales, and for helpful comments from participants in seminars at Harvard Business School, the College of William and Mary, the Federal Reserve Bank of Chicago, and the 2003 meetings of the Western
Finance Association.
ÃCorresponding author.
E-mail address: [e-mail] (D. Bergstresser).

0304-405X/$ - see front matter r 2005 Elsevier B.V. All rights reserved. doi:10.1016/j.jfineco.2004.10.011 ARTICLE IN PRESS
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D. Bergstresser, T. Philippon / Journal of Financial Economics 80 (2006) 511–529

0.08

0.07

0.06

1990

1995

2000

Fig. 1. Average accurual ratios, size weighted.

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