Accounting irregularities, management compensation structure and information asymmetry

Fayez A. Elayan, Jingyu Li and Thomas O. Meyer

Accounting and Finance, 2008, vol. 48, issue 5, 741-760

Abstract: The discovery of accounting irregularities is an important negative event for a company. The restatement resulting from the irregularity represents an average of 364 per cent of net income for the 152‐firm sample and the irregularities are predominantly revenue enhancing. The irregularity firms exhibit both lower transparency and visibility compared to a matched sample of non‐irregularity firms. Furthermore, prior to the announcement, these firms experienced poorer operating performance and their executive compensation structure is found to be significantly more equity‐based. Therefore, firms that have greater opportunity and incentive are shown to be more likely to commit accounting irregularities.

Date: 2008
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