The paper studied the relationship between chief executive officer (CEO) equity incentives and accounting irregularities. 1.
How the study was conducted
The study was based on Agency theory and conducted through below steps: •
CEO equity incentives, measured between 2001 and 2005, are obtained from a comprehensive database provided by Equilar, Inc. There are three different types of “accounting irregularities” are taken into account •
Matched-pair research design using archival data that matches a treatment firm with a control firm that is similar across all observable relevant variables is applied. . •
The sensitivity tests were performed to consider the effect of (i) Proxy for CEO equity incentives; (ii) source of sample selection; (iii) econometric approach and (iv) time period. 2.
Results of the study
After using propensity-score matched-pair research design, the results of the study are: •
There is little evidence of a positive relationship between CEO equity incentives and the incidence of accounting-related restatements, shareholder lawsuits alleging accounting manipulation, and AAERs. •
Unlike most prior research, the results of this paper are most consistent with the notion that equity incentives play a role in aligning managers’ interests with those of shareholders with regard to financial reporting. •
Propensity score results provide a better basis for statistical inference about the effect of the treatment in the absence of precise knowledge about the underlying structural relationship among the variables of interest. •
Moreover, propensity-score methods also enable the researcher to explicitly quantify the sensitivity of the results for the primary causal variable to unobserved correlated omitted variables. 3.
Weaknesses for the study
We found the following points that we believe representing weaknesses. •
First, the research measures the accounting irregularities based on identified...
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