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Executive stock options: The effect on discretionary accruals and earnings manipulation

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Date Issued:
1998
Summary:
My objective is to evaluate whether managers, when executive stock options (ESOs) are part of their compensation, manipulate earnings by using discretionary accruals (DAs). Earnings manipulation requires managers to have some targets or expectations in mind. The target may be in the form of investors' expectations or the managers' own subjective expectations. Although meeting investors' expectations could result in income smoothing, executives might also manipulate earnings to achieve their own subjective expectations for private gains. I develop and test three hypotheses using logistic regression to address the issue of earnings manipulation by executives. The first hypothesis evaluates the likelihood of income smoothing when in-the-money ESOs (RVESO) are exercisable. RVESO represents the total value of exercisable ESOs in-the-money for the top five executives as disclosed in the proxy statement. The second hypothesis addresses the likelihood of earnings manipulation when a substantial dollar value of in-the-money ESOs are exercisable. The third hypothesis uses prior-period DAs to consider the possible effect of the value realized from exercise of ESOs on earnings manipulation. The empirical results of this study provide evidence that executives are not more likely to manipulate earnings when ESOs are part of the compensation package. Results indicate that an increase in the value of the RVESO does not increase the likelihood that management will use DAs to smooth income or manipulate earnings. One explanation of these findings could be that managers have some restraints on their actions that includes, but are not limited to, the presence of audit committees, vigilance by external auditors, the existence of an efficient labor market, and financial institutions that hold a sizable percentage of equity. Dechow, Sloan, and Sweeney (1996) state that fear of exposure and consequent penalty by the stock market is another constraint on managerial actions.
Title: Executive stock options: The effect on discretionary accruals and earnings manipulation.
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Name(s): Maheshwari, Suneel Kumar
Florida Atlantic University, Degree Grantor
Hopwood, William S., Thesis Advisor
Type of Resource: text
Genre: Electronic Thesis Or Dissertation
Date Issued: 1998
Publisher: Florida Atlantic University
Place of Publication: Boca Raton, Fla.
Physical Form: application/pdf
Extent: 116 p.
Language(s): English
Summary: My objective is to evaluate whether managers, when executive stock options (ESOs) are part of their compensation, manipulate earnings by using discretionary accruals (DAs). Earnings manipulation requires managers to have some targets or expectations in mind. The target may be in the form of investors' expectations or the managers' own subjective expectations. Although meeting investors' expectations could result in income smoothing, executives might also manipulate earnings to achieve their own subjective expectations for private gains. I develop and test three hypotheses using logistic regression to address the issue of earnings manipulation by executives. The first hypothesis evaluates the likelihood of income smoothing when in-the-money ESOs (RVESO) are exercisable. RVESO represents the total value of exercisable ESOs in-the-money for the top five executives as disclosed in the proxy statement. The second hypothesis addresses the likelihood of earnings manipulation when a substantial dollar value of in-the-money ESOs are exercisable. The third hypothesis uses prior-period DAs to consider the possible effect of the value realized from exercise of ESOs on earnings manipulation. The empirical results of this study provide evidence that executives are not more likely to manipulate earnings when ESOs are part of the compensation package. Results indicate that an increase in the value of the RVESO does not increase the likelihood that management will use DAs to smooth income or manipulate earnings. One explanation of these findings could be that managers have some restraints on their actions that includes, but are not limited to, the presence of audit committees, vigilance by external auditors, the existence of an efficient labor market, and financial institutions that hold a sizable percentage of equity. Dechow, Sloan, and Sweeney (1996) state that fear of exposure and consequent penalty by the stock market is another constraint on managerial actions.
Identifier: 9780599117150 (isbn), 12584 (digitool), FADT12584 (IID), fau:9470 (fedora)
Note(s): College of Business
Thesis (Ph.D.)--Florida Atlantic University, 1998.
Subject(s): Executives--Salaries, etc
Employee Stock Options
Accrual Basis Accounting
Held by: Florida Atlantic University Libraries
Persistent Link to This Record: http://purl.flvc.org/fcla/dt/12584
Sublocation: Digital Library
Use and Reproduction: Copyright © is held by the author with permission granted to Florida Atlantic University to digitize, archive and distribute this item for non-profit research and educational purposes. Any reuse of this item in excess of fair use or other copyright exemptions requires permission of the copyright holder.
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Host Institution: FAU
Is Part of Series: Florida Atlantic University Digital Library Collections.