Shareholder Activism and Earnings Management Incentives: An Empirical Examination of Shareholder Proposals in the U.S.
Journal of International Financial Management & Accounting, Forthcoming
Posted: 18 Jan 2011 Last revised: 1 Sep 2013
Date Written: June 20, 2013
In this paper, we investigate the effect of shareholder activism on earnings management. Using a US sample of shareholder pay-for-performance proposals sponsored by institutional investors, we find that when compared to control firms, firms targeted by shareholder proposals have a greater magnitude of discretionary accruals in their reported earnings. In addition, we find that the likelihood of meeting or beating earnings benchmarks through the use of discretionary accruals is higher for targeted firms whose managers have job security concerns due to the firms’ inferior stock performance in the past or have plans to sell company stock. Our results are consistent with the notion that pay-for-performance proposals have unintended consequences by introducing or exacerbating incentives to manage earnings for short-term gains. The results also indicate that, for financial reporting, the short-termism effect may dominate the alignment and/or disciplinary effect of shareholder monitoring.
Keywords: shareholder activism, managerial incentives, earnings management, insider trading
JEL Classification: M4, G1, D8
Suggested Citation: Suggested Citation