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The impact of corporate governance on the relationship between earnings management and CEO compensation

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

Journal of Applied Accounting Research

ISSN: 0967-5426

Article publication date: 21 January 2021

Issue publication date: 7 May 2021

1174

Abstract

Purpose

The study examines whether corporate governance moderates the relationship between CEO compensation and earnings management.

Design/methodology/approach

The study uses 1,800 firm-year observations from 2005 to 2010 and employ multiple regression analyses and other sensitivity tests.

Findings

The study finds a positive relationship between CEO compensation and earnings management. The study’s results also suggest that CEO bonus compensation increases in relation to earnings management and therefore the study infers that managers may become involved in earnings management to increase their compensation. However, the study finds that the relationship is moderated by a strong corporate governance system which reduces the impact of earnings management on CEO compensation.

Research limitations/implications

The study is conducted in a specific context, and therefore it may be subject to a set of limitations. The study emphasises exclusively on whether executives manage earnings to increase their compensation. The study does not consider the issue of several other and potentially contradictory motivations here.

Practical implications

The study’s findings highlight potential implications and offer useful propositions for stakeholders, particularly accounting and corporate governance regulators, to consider. The findings offer a basis for the accounting professions to further discuss and improve accounting standards to provide adequate regulations and monitoring to decrease managerial opportunistic behaviours in earnings manipulations. The findings also emphasise the need for appropriately designed CEO compensation packages in such a manner that improves the manager–shareholder alignment and reduces the information asymmetry problem. The results signify that corporate governance plays a vital role in mitigating the relationship between CEO compensation and earnings management.

Originality/value

This study adds to the existing literature by documenting empirical support on the link between earnings management and CEO compensation against a backdrop of high demand for strong corporate governance practices.

Keywords

Citation

Assenso-Okofo, O., Jahangir Ali, M. and Ahmed, K. (2021), "The impact of corporate governance on the relationship between earnings management and CEO compensation", Journal of Applied Accounting Research, Vol. 22 No. 3, pp. 436-464. https://doi.org/10.1108/JAAR-11-2019-0158

Publisher

:

Emerald Publishing Limited

Copyright © 2021, Emerald Publishing Limited

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