Real versus accounting earnings management: The effect of performance measure timing constraints

Author:

Krapp Michael1,Schultze Wolfgang2ORCID,Weiler Andreas2

Affiliation:

1. Department of Quantitative Methods University of Augsburg Augsburg Germany

2. Department of Accounting University of Augsburg Augsburg Germany

Abstract

AbstractWe study the influence of stricter rules for determining performance measures for compensation contracts on managers' choice between real and accounting earnings management. Constraints, like accounting regulation or corporate governance, limit managers' influence on performance measures. We find that tighter constraints intensify real earnings manipulation, because they reduce incentives for managers to supply effort on investment activities. In turn, discretion allows managers to anticipate future benefits of investment and reduces real earnings management. The results hold when contracts include forward‐looking information and suggest that constraints on managers' influence on performance measures drive the choice between accounting and real earnings management.

Publisher

Wiley

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