Journal
JOURNAL OF FINANCIAL ECONOMICS
Volume 87, Issue 2, Pages 357-373Publisher
ELSEVIER SCIENCE SA
DOI: 10.1016/j.jfineco.2007.03.003
Keywords
corporate governance; earnings management; financial performance; stock options
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We ask whether the apparent impact of governance structure and incentive-based compensation on firm performance stands up when measured performance is adjusted for the effects of earnings management. Institutional ownership of shares, institutional investor representation on the board of directors, and the presence of independent outside directors on the board all reduce the use of discretionary accruals. These factors largely offset the impact of option compensation, which strongly encourages earnings management. Adjusting for the impact of earnings management substantially increases the measured importance of governance variables and dramatically decreases the impact of incentive-based compensation on corporate performance. (c) 2007 Elsevier B.V. All rights reserved.
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