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Equity Incentives and Earnings Management: Evidence from the Banking Industry

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TLDR
This article examined the relationship between equity incentives and earnings management in the banking industry and found that bank managers with high equity incentives are more likely to manage earnings, but only when capital ratios are closer to the minimum regulatory capital requirements.
Abstract
We examine the relationship between equity incentives and earnings management in the banking industry. By focusing on this regulated industry and using industry-specific earnings management proxies, we provide evidence on the impact of regulation on earnings management arising from CEOs' equity incentives. We find that bank managers with high equity incentives are more likely to manage earnings, but only when capital ratios are closer to the minimum regulatory capital requirements. This finding indicates that in the banking industry, potential regulatory intervention induces, rather than mitigates, earnings management arising from equity incentives.

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Understanding Earnings Quality: A Review of the Proxies, Their Determinants and Their Consequences

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Evidence on the Trade-Off between Real Activities Manipulation and Accrual-Based Earnings Management

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The Role of Information and Financial Reporting in Corporate Governance and Debt Contracting

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CFOs versus CEOs: Equity Incentives and Crashes

TL;DR: In this paper, the authors used a large sample of U.S. firms for the period 1993-2009 and found that the sensitivity of a chief financial officer's (CFO) option portfolio value to stock price is significantly and positively related to the firm's future stock price crash risk.
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Chief Executive Officer Equity Incentives and Accounting Irregularities

TL;DR: This article examined whether chief executive officer (CEO) equity-based holdings and compensation provide incentives to manipulate accounting reports and found no evidence of a positive association between CEO equity incentives and accounting irregularities after matching CEOs on the observable characteristics of their contracting environments.
References
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Journal ArticleDOI

Risk, Return, and Equilibrium: Empirical Tests

TL;DR: In this article, the relationship between average return and risk for New York Stock Exchange common stocks was tested using a two-parameter portfolio model and models of market equilibrium derived from the two parameter portfolio model.
Journal ArticleDOI

The Structure of Corporate Ownership: Causes and Consequences

TL;DR: In this paper, the authors argue that the structure of corporate ownership varies systematically in ways that are consistent with value maximization, and they find no significant relationship between ownership concentration and accounting profit rates for a set of firms.
Book

The effects of bonus schemes on accounting decisions

TL;DR: The authors analyzed the format of typical bonus contracts, providing a more complete characterization of their accounting incentive effects than earlier studies, and found that accrual policies of managers are related to income-reporting incentives of their bonus contracts.
Posted Content

CEO Incentives and Earnings Management

TL;DR: This article found 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.
Journal ArticleDOI

Managerial ownership, accounting choices, and informativeness of earnings

TL;DR: In this paper, the authors hypothesize that the level of managerial ownership affects both the informativeness of earnings and the magnitude of discretionary accounting accrual adjustments, and show that managerial ownership is positively associated with earnings' explanatory power for returns and inversely related to the extent and consequences of accounting-based contractual constraints.
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