 Equity-based Executive Compensation, Managerial Legal Liability Coverage and Earnings ManagementTzu-Ching Weng, Chia-Hsuan Tseng, Chun-Ho Chen and Yun-Sheng Hsu Journal of Applied Finance & Banking, 2014, vol. 4, issue 3, 10 Abstract: This study investigates how managers’ compensation incentives, as measured by equity-based executive compensation and managerial legal liability coverage affect earnings management. The availability of compensation may encourage managers to adopt more aggressive accounting practices; however, the higher the legal liability managers face, the more it will reduce their willingness to engage in such risk-taking behavior. Once managers mitigate their personal legal liability through directors’ and officers’ (D&O) liability insurance, they may be more inclined to manipulate reported earnings. We use excess D&O liability insurance coverage as a proxy for managerial liability coverage and test a sample of listed firms in Taiwan where D&O liability insurance purchases are publicly disclosed. We find that managers whose compensation is equity-based are more likely to adopt an opportunistic accounting strategy when they are covered by relatively high levels of D&O liability insurance; this suggests that the primary determination of earnings management is the joint effect of an increase in managers’ compensation incentives and a decrease in their legal liability. Date: 2014 Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:spt:apfiba:v:4:y:2014:i:3:f:4_3_10 Access Statistics for this article More articles in Journal of Applied Finance & Banking from SCIENPRESS Ltd |
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