Insider Holding Requirements and Earnings Management
Posted: 28 Apr 1997
Date Written: April 1997
This study examines how generally accepted accounting principles influence firm responses to Securities and Exchange Commission rule changes. It shows that a change in insider holding requirements for employee stock options led to a decrease in the use of stock appreciation rights, a response caused by the disadvantageous accounting treatment of stock appreciation rights relative to employee stock options. Further, firms that decrease their use of stock appreciation rights compensate employees by increasing their use of employee stock options. Cross-sectionally we find the likelihood a firm decreases its use of stock appreciation rights is positively associated with the magnitude of expense associated with stock appreciation rights, the firm's use of income-increasing accounting methods, and firm performance. While these results are consistent with earnings management, the finding that these firms are better performing and less leveraged lead us to believe that the choice is driven by efficiency considerations rather than managerial opportunism.
JEL Classification: M41, M43, J33
Suggested Citation: Suggested Citation