Insider Holding Requirements and Earnings Management

Posted: 28 Apr 1997

See all articles by Steven Balsam

Steven Balsam

Temple University - Department of Accounting

Wonsun Paek

Sungkyunkwan University

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

Balsam, Steven and Paek, Wonsun, Insider Holding Requirements and Earnings Management (April 1997). Available at SSRN:

Steven Balsam (Contact Author)

Temple University - Department of Accounting ( email )

306 Speakman Hall
Philadelphia, PA 19122
United States
215-204-5574 (Phone)
215-204-5587 (Fax)


Wonsun Paek

Sungkyunkwan University ( email )

25-2, Sungkyunkwan-ro
Seoul, 03063
Korea, Republic of (South Korea)
+82-2-760-0415 (Phone)
+82-2-745-4566 (Fax)

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