Earnings Management by Changing R&D Expenditure: Evidence on the Role of CEO Stock Compensation

50 Pages Posted: 24 Nov 2003

See all articles by Frank He

Frank He

City University of Hong Kong (CityUHK) - Department of Accountancy

Bin Srinidhi

University of Texas at Arlington - Department of Accounting; City University of Hong Kong (CityUHK) - Department of Accountancy

Xijia Su

City University of Hong Kong (CityUHK) - Department of Accountancy

Ferdinand A. Gul

Monash University Sunway Campus

Abstract

This paper examines whether the payment of a higher portion of stock relative to cash compensation for CEOs mitigates earnings management through R&D expenditure. Results using a sample of 7,246 firm-year observations of US corporations during 1992-2001 show that CEOs are more likely to cut R&D expenditure to avoid decreases in reported earnings (i) when the cash portion of their compensation is greater than the stock portion and (ii) when the cash portion relative to the stock portion is increased over a period of time. Results also show that the positive association between cash-based compensation and R&D reduction is stronger in firms with CEOs who also serve as board chairman (CEO dominance).

Keywords: stock compensation, cash compensation, myopic R&D investments, earnings management, CEO dominance

JEL Classification: M41, M43, J33, G34

Suggested Citation

He, Frank and Srinidhi, Bin and Su, Xijia and Gul, Ferdinand A., Earnings Management by Changing R&D Expenditure: Evidence on the Role of CEO Stock Compensation. Available at SSRN: https://ssrn.com/abstract=459040 or http://dx.doi.org/10.2139/ssrn.459040

Frank He

City University of Hong Kong (CityUHK) - Department of Accountancy ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong
China

Bin Srinidhi

University of Texas at Arlington - Department of Accounting ( email )

Arlington, TX 76013
United States

City University of Hong Kong (CityUHK) - Department of Accountancy ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong
China

Xijia Su

City University of Hong Kong (CityUHK) - Department of Accountancy ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong
China
+852 2788 7995 (Phone)
+852 2788 7944 (Fax)

Ferdinand A. Gul (Contact Author)

Monash University Sunway Campus ( email )

Jalan Lagoon Selatan
Selangor Darul Ehsan
Bandar Sunway, 46150
Malaysia

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