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The effects of global financial crisis on the relationship between CEO compensation and earnings management

Oheneba Assenso-Okofo (Department of Accounting, La Trobe University, Melbourne, Australia)
Muhammad Jahangir Ali (Department of Accounting and Data Analytics, La Trobe University, Melbourne, Australia)
Kamran Ahmed (Department of Accounting, La Trobe University, Melbourne, Australia)

International Journal of Accounting & Information Management

ISSN: 1834-7649

Publication date: 27 March 2020

Abstract

Purpose

This paper aims to examine the effects of global financial crisis (GFC) on chief executive officers’ (CEO) compensation and earnings management relationship. Specifically, the authors examine whether the recent financial crisis had moderated the relationship between CEO bonus and discretionary accruals.

Design/methodology/approach

The authors use panel data for 1,800 firm-year observations (over a period of six years from 2005 to 2010) and use univariate and multivariate tests to test their hypothesis. The authors divide the period into pre-crisis, during-crisis and post-crisis periods to examine how the different financial crisis periods affect the relationship between CEO compensation and earnings management. Various alternative tests including endogeneity test suggest that the results are robust.

Findings

The authors’ multivariate results indicate that the relationship between CEO’ compensation and earnings management changes because of the GFC.

Practical implications

The findings, therefore, justify more monitoring and scrutiny to limit the existence of opportunistic managerial behaviour and for the appropriate designing of CEO compensation packages during abnormal economic circumstances.

Originality/value

So far as the authors’ knowledge goes, this is the first study which examines the relationship between CEO compensation and earnings management during GFC.

Keywords

Acknowledgements

Erratum: It has come to the attention of the publisher that the article, Assenso-Okofo, O., Ali, J. and Ahmed, K. (2020), “The effects of global financial crisis on the relationship between CEO compensation and earnings management”, International Journal of Accounting & Information Management, Vol. 28 No. 2, contained an error in the author name and affiliation for Muhammad Jahangir Ali. These errors were introduced in the production process and have now been corrected online.

The authors would like to acknowledge the comments and suggestions received from the participants at the Asian-Pacific Conference on International Accounting Issues, November 6-9, 2016, Maui, Hawaii, and at the seminar of Department of Accounting, La Trobe University, Melbourne, Australia, on the earlier versions of the paper.

Citation

Assenso-Okofo, O., Ali, M.J. and Ahmed, K. (2020), "The effects of global financial crisis on the relationship between CEO compensation and earnings management", International Journal of Accounting & Information Management, Vol. 28 No. 2, pp. 389-408. https://doi.org/10.1108/IJAIM-08-2019-0101

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Publisher

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Emerald Publishing Limited

Copyright © 2020, Emerald Publishing Limited

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