In this chapter I will seek to advert some general features of the key-elements of my thesis, such as some definitions of net incomes direction or equity inducements, what impact had the execution of SOX statute law to these two and besides some utile theories that have been developed over the old ages and may be related to the cardinal “ significances ” of net incomes direction and equity inducements. The primary purpose of this chapter will be to supply the reader of this survey with a more clear and comprehensive overlook. More specific, Paragraph 2.1 refers to net incomes direction and the motivations that drive it, Paragraph 2.2 discusses the general significance of equity inducements, Paragraph 2.3 trades with the execution of Sarbanes Oxley ( SOX ) Act in 2002 and eventually, Paragraph 2.4 cites some basic theories around executives ‘ compensation and net incomes direction.
2.1 Net incomes Management
By and large, net incomes are believed to be one of the most of import information points provided in the fiscal statements of a company. Harmonizing to Lev ( 1989 ) , they are a rather dependable index to happen out to what extent a house has engaged in value-added activities. A bulk of companies ‘ stakeholders such as investors, employers and proprietors in their effort to make to the right and allow for the house ‘s public presentation determinations ask for and utilize this information together with all the other fiscal studies. Firms tend to pay a important attending to the manner they report their net incomes and a ground for making so is because net incomes except for being of import -for the operation of the house as a whole, as it has already mentioned before- are rather utile every bit good.
Executives ( CEOs – Chief financial officer ) and directors, as it is widely known, are chiefly responsible for the company ‘s public presentation. However, rather frequently, in order to accomplish their personal end and hike their single compensations, they might act upon the fiscal Numberss -either upwards or downwards- and therefore these activities may besides impact the reported net incomes.
Net incomes direction is a much debated and mostly treated, by the academic accounting society and literature, phenomenon. A impersonal definition, go forthing room for both good and bad reading, given by Scott ( 2009 ) presents net incomes direction as being “ The pick by a director of accounting policies, or actions impacting net incomes, so as to accomplish some particular reported net incomes aim ” . By and large, we can state that it is the usage of a specific accounting method to pull strings net incomes figure in a certain way. However, there is a important assortment of different definitions given to net incomes direction by anterior literature. Some of them present net incomes direction as a negative and deceptive phenomenon, some others non.
One of the most often used in the literature definitions for net incomes direction is given by Healy and Wahlen ( 1999 ) : “ Net incomes direction occurs when directors use judgement in fiscal coverage and in structuring minutess to change fiscal studies to either misdirect some stakeholders about implicit in economic public presentation of the company or to act upon contractual results that depend on reported accounting Numberss ” . What can be easy concluded from the above definition is that net incomes direction is fundamentally described as a negative phenomenon. The usage of word “ mislead ” clearly thrust as to normally illegal actions and timeserving behaviours on behalf of the directors which have as chief purpose the maximization of the executives ‘ wealth alternatively of house ‘s well-performance. Furthermore, another well-known definition which besides presents net incomes direction in a negative mode comes from Schipper ( 1989 ) . “ Earnings direction is a purposeful intercession in the external fiscal coverage procedure, with the purpose of obtaining some private addition. ”
However harmonizing to anterior literature and as stated before, non all net incomes direction are timeserving and deceptive. Jirapon et Al. ( 2008 ) claim that “ net incomes direction may be good, because it potentially improves the information value of net incomes ” , while McKee ( 2005 ) cited by Grasso et Al. ( 2009 ) agrees, specifying net incomes direction as “ sensible and legal direction determination devising and coverage intended to accomplish stable and predictable fiscal consequences ” . Furthermore, harmonizing to Dechow and Skinner ( 2000 ) , net incomes direction, in general footings, has a broader construct. They believed that it could besides be used as a
utile vehicle in order to increase the informativeness of investors by the usage of accumulations in conformity with the accounting ordinances and rules, such as the matching and the gross acknowledgment. Finally, a different position is given by Ronen and Yaari ( 2008 ) who classify the different definitions of net incomes direction as black, gray and white. Black refers to wholly deceit of fiscal studies, white pertains to the fact that the transparence of studies are enhanced by the net incomes direction and at the terminal, the Grey, when studies are managed within the boundaries of conformity with bright-line criterions, which could be either timeserving or efficiency enhancing ( Ronen and Yaari 2008 ) .
It would be utile to advert that by and large harmonizing to Cohen, Dey and Lys, ( 2007 ) , there are two cardinal classs for net incomes direction. The first 1 is the Real Net incomes Management, which can happen through the lessening of some specific discretional disbursals such as advertisement, SG & A ; A or R & A ; D disbursals and besides the study of lower cost of goods sold through increased production, while the 2nd is the Accrual-based Earnings Management.
2.1.1 Motivations for Earnings Management
Despite the fact that it is a common secret that net incomes direction exists, it is rather hard to turn out it and observe it. Healy and Wahlen ( 1999 ) cited that the job to turn out that net incomes direction truly exists “ arises chiefly because, to place whether net incomes have been managed, research workers foremost have to gauge net incomes before the effects of net incomes direction, which is non an easy undertaking ” . Thus, a manner to do the sensing of net incomes direction a more executable undertaking may be to cognize the inducements and the motive which normally leads to it. The anterior literature has used a assortment of grounds of different inducements behind net incomes direction. However, we are traveling to be based on the segregation made by Healy and Wahlen ( 1999 ) . As a effect, the classification of the three motivations which trigger net incomes direction consists of:
The capital market motives
The catching motives
The regulative motives
It would be good to advert that particularly the first two classs seem to drive, more extensively, net incomes direction. More specific:
The first sort of motives, the capital market, pertains to the inducements sing the outlooks of the market and other rating issues. It is normally known that investors, every bit good as all other interested parties ( such as fiscal analysts ) rely on all the available in the market information ( and particularly those that come from the houses through their accounting revelations ) in order to foretell the future public presentation or the possible profitableness of a house and besides to value its stocks. Taking under consideration this foreigners ‘ power and influence and besides the fact that the accounting revelations published by the houses can be easy manipulated by the houses ‘ top executives such as the Chief Executive Officers or Chief Financial Officers, we can logically reason that organisations ‘ direction can easy be incentivized to pull strings net incomes and accounting information to accomplish specific aims, like short-run stock monetary value public presentation or to run into analyst ‘s prognosiss. Besides, it is proved from a big sum of old surveies and by Healy and Wahlen ( 1999 ) , that either houses normally tend to pull off net incomes upwards ( increasing their stock monetary value ) , so as to go more attractive to investors and besides executives obtain more personal benefits, or downwards ( diminishing stock monetary values ) merely before they repurchase portions on the stock market. It is utile to advert that this class of motives has become really of import, particularly during 1990s and subsequently, after the all the more extended usage of equity incentive-based, depending on the stock monetary values, compensations of directors, and besides the increased importance that stock market rating started to hold ( Dechow and Skinner, 2000 ) .
Second, the catching motives refer to inducements covering with contracts created for executives ‘ compensation and debt compacts issues. Equally far as the first 1 is concerned, it pertains to the developed fillip program hypothesis, harmonizing to which directors is likely to be involved in net incomes changing, in order to maximise their
bonus-based inducements through the achievement of the in agreement bonus-terms in their compensation contracts. Sing, now the later one, directions can normally turn to pull off their net incomes in a discretional manner, in instances where there are specific understandings in debt compacts and when these understandings are close to misdemeanor on behalf of the organisation. Acerate leaf to state that it is obvious that there is a strong association between the first and the 2nd sort of motives, since over the last two decennaries, the CEOs ‘ fundamentally, and over the last old ages the CFOs ‘ compensation programs and contracts are normally consisted of stock-based and option-based inducements. Besides, this relationship I will seek to look into subsequently in this survey.
Finally, the last sort of motives, the regulative motives, includes inducements which have to make with anti-trust and other authorities ordinances, normally sing specific industries. Based on Watts and Zimmerman ( 1978 ) , directors of houses which are more prone to anti-trust probe, are encouraged to pull off their net incomes, normally downwards, so as to look less profitable and avoid pulling attending. Besides, it is a fact that some specific industries, such as insurance and banking industries, are more regulated and this leads to a more frequent and extended net incomes direction in order to fulfill the regulators ( Petroni, 1992 ) .
2.2 Equity Incentives
Jensen and Meckling ( 1976 ) focused on the conflicting relationship between directors and shareholders/owners. They claimed that a linkage between the directors ‘ compensation and stockholders ‘ wealth should be in order to cut down the bureau costs. The execution of equity-linked compensation was presented as a possible solution to this job. Therefore, equity inducements are created in order to aline directors ‘ involvements with that of stockholders and actuate the first 1s to increase the houses ‘ value.
More specific, we can state that equity incentives is a sort of motive which encourages directors to increase and better the house ‘s portion monetary value. This motive normally stems from the stock-based compensation and stock/option ownership, which are two normally used sorts of equity inducements. Since the 1890ss, harmonizing to
Hall and Liebman ( 1998 ) , “ portions and options were a really common manner to counterbalance house ‘s direction ” . The last old ages, there is besides a important addition in the usage of stocks and options, dwelling presents a individual largest constituent of the bing senior executives ( CEOs-CFOs ) wage.
Aggarwal & A ; Samwick ( 1999 ) examined the importance of stocks and options on the wealth of the company. The consequences showed that alterations in the value of the company ‘s stock and options have a immense consequence in the wealth of the company.Stock is the most usual manner for executives to go portion of the house ‘s ownership. Stockss are granted to executives either as normal stock grants or as restricted stock grants. “ Restricted stock grants can non be sold within a pre-determined clip or before the house reaches a standard public presentation end ” ( Ronen and Yaari 2008 ) . Stock options, on the other manus, are contracts that give the proprietor the “ right ” , but non the “ duty ” , to purchase or sell a stock at an agreed-upon ( exercising ) monetary value withinA a certain periodA or on a specific day of the month. Executives who own this sort of options are traveling to hold net income merely when the portion monetary value is higher than the exercising monetary value -known as “ in the money ” – , otherwise non. Based on this, Murphy ( 1999 ) states that a ground that stock options do non give the same inducements compared to stock ownership is that option lose inducements when they are non “ in the money ” . Besides, harmonizing to Zhang et
Al. ( 2008 ) , “ compared to stock options, stock ownership has a more direct consequence on executives ‘ current wealth, because executives really own the stocks in the most existent sense ” .
2.3 Sarbanes Oxley Act ( SOX ) Legislation
The explosion of the hi-tech bubble in the first one-fourth of 2000, followed by other fraud dirts such as Enron, Xerox, Arthur Andersen, Adelphia and other US corporations in the beginning of twentieth century had started to raise great involvement in the importance of corporate administration in training houses and besides inquiries sing to what extent could the corporate fiscal coverage be characterized as dependable. The undependability of corporate directors, proctors and the market in these instances raised statements in favour of the demand for authorities regulators to reconstruct assurance in the
securities markets ( Cohen, Dey and Lys, 2004 ) . However, it was the public indignation following disclosures of monolithic accounting fraud at WorldCom that spurred Congress to go through the Sarbanes-Oxley ( SOX ) Act of 2002 with unexpected speed ( Li, Pincus and Rego, 2008 ) . More specific, the Act combines the enterprises of the Representative Michael Oxley, president of the House Financial Services Committee, and Senator Paul Sarbanes, president of the senate Banking Committee ( Ronen and Yaari 2008 ) .
The Sarbanes-Oxley Act ( SOX ) of 2002 was the most of import statute law impacting corporate fiscal coverage enacted in the United States since the 1930s. The declared intent of the act was to “ protect investors by bettering the truth and dependability of corporate revelations made pursuant to the securities Torahs ” ( Hamilton and Trautman 2002, p.87 ) . Furthermore, US President George W. Bush in 2002 described the statute law as integrating the “ most far-reaching reforms of American concern patterns ” since the Great Depression.
Added to the aforementioned, the SOX statute law besides set new processs sing the revelations for companies in the United States and higher criterions on the quality of fiscal information conducted in the market. Risks refering the top executives like CEOs and CFOs besides increased. SOX officially require that CFOs, every bit good as CEOs, provide personal enfranchisement on the truth and completeness of the fiscal information released by the company ( Jiang et al. 2010 ) . More specific, every bit far as the hazards are concerned, they can be viewed in the Sections 404 and 302, which cope with the new duties of executives. Under these parts of the SOX statute law:
“ It is really of import for directors to hold an internal control system that will be effectual when fiscal studies are to be prepared. This internal control system includes several controls when minutess take topographic point inside a company and these minutess are of major importance in order to fix the fiscal studies of a company. Specifically, in subdivision 302 the internal controls of a company have to be certified sporadically in a quarterly and one-year footing by the directors. In subdivision 404 directors of publically held companies should supply an one-year study which will stand for how effectual are the internal controls of the entity. This one-year study should include: 1 ) a statement for set uping and keeping adequate and
effectual internal control from the direction of the entity, 2 ) an appraisal of how effectual is the company ‘s internal control system over fiscal coverage, 3 ) a statement from the external hearers of the company rating the directors work over the company ‘s internal control system, 4 ) a written decision of how effectual is the company ‘s internal control system over fiscal coverage and 5 ) a statement which identifies what model is used in the appraisal of internal controls ” ( James A. Hall, p.131 ) .
2.3.1 SOX and Equity-based Executives Compensation
Many anterior surveies tried to analyze the consequence of SOX on executives -the bulk is referred to CEOs than to CFOs- compensations. Chang et Al. ( 2011 ) examined the impact that SOX statute law had on the wage public presentation sensitiveness of CEO ‘s between regulated and unregulated industries. They concluded that a important lessening in the stock ownership and the entire wage public presentation sensitiveness took topographic point, particularly in the unregulated industries, holding more or less with the consequences of other surveies that after the execution of SOX the inducements of stockholders are non so purely connected with those of CEO, since CEOs started to possess more duties and the ordinance sing the subject steps and punishments was rather stricter than in the pre-SOX period. On the contrary, in the instance of regulated industries, the consequences showed that the stock ownership and the entire wage public presentation sensitiveness did non alter, intending that the alliance between the inducements of CEOs and stockholders continued to be and why non increased. Furthermore, harmonizing to Banerjee et Al. ( 2005 ) after the Enron clang and -subsequently- the visual aspect of SOX, there was a lessening in the sum of option-based compensation to CEOs, since the stock options granted to them besides decreased.
Furthermore, in conformity with the aforementioned, the survey of Cohen et Al. ( 2004 ) stated that the compensations based on options decreased after SOX for CEOs, while at the same clip the compensations based on standard wage and fillips increased. That means that the nature of compensation changed, advancing more the fixed wage granted to CEOs, from the shareholders/owners, than the inducement based payment. This, really, happened because of the considerably increased hazard that
executives started to face. Another cogent evidence that SOX statute law changed the nature of executives manner of payment is presented in the book of ( James A. Hall, p.123 ) , where “ the compensation should be carefully determined by the compensation commission in order to supply executives with right inducements that will be for the best of the house and for stockholders ” . Finally Jiang et Al. ( 2010 ) analyzing the association between -basically- CFOs and CEOs equity inducements and net incomes direction, they found that the combined sum of both CEO and CFO equity compensation has declined during the post- SOX period.
2.3.2 SOX and Earnings Management
As it is stated prior in this survey, SOX statute law was implemented, to better the truth and dependability of corporate revelations by modifying administration, coverage and revelation regulations for public companies ( Cohen et al. 2004 ) and in general footings, to extinguish the net incomes direction, which in the beginning of this century started to go an all the more common phenomenon. SOX aimed to protect the involvements of investors by reconstructing their descending assurance on the dependability and unity of houses ‘ fiscal coverage, through the timely, accurate and extremely choice revelations to the populace. Furthermore, through the development of this new statute law, regulators tried to do clear that By and large Accepted Accounting Principles ( GAAP ) could non be used as a defence against charges of malicious net incomes direction patterns any longer and that it was expected from SOX to cut down those sort of patterns ( McEnroe, 2007 ) . A considerable figure of steps such as the addition of punishments for corporate frauds were implemented to better both the quality and measure of dependable information available to the populace and heighten the transparence of corporate fiscal coverage ( Chang et al. 2009 ) . A measure to this way and, at the same clip, to the turning away of net incomes direction was the addition in the answerability of the board of managers and the alteration in the relationships between them and the top executives, presenting the compulsory independency of the scrutinizing commission and the fiscal literate of its members ( Chang et al. 2009 ) , in order to command the executives ‘ term of offices in specific hierarchal degrees.
As it is mentioned before, harmonizing to Sections 302 and 404, both CEOs and CFOs are obligated to personally attest the corporation ‘s fiscal studies -either quarterly or annually- which practically means that under SOX, and every bit far as the fiscal inadvertence of the house is concerned, CFOs ‘ duties have besides risen and started to aline with these of CEOs. Furthermore, the deficiency of conformity with the Section 404 and the non-certification of the fiscal studies may incur terrible punishments for the house and its top executives. As a effect, the acceptance of baneful net incomes direction may go rather dearly-won ( Ronen and Yaari, 2008, p. 60 ) and that is besides a chief ground why it was expected that in the post-SOX period, a considerable lessening in net incomes direction patterns may take topographic point.
In add-on, ( Cohen, Dey and Lys, 2008 ) examined the relation between the usage of net incomes direction -both existent and accrual-based- before and after the execution of SOX statute law in 2002. The consequences from their survey showed that “ accrual-based net incomes direction increased steadily from 1987 until the transition of the Sarbanes-Oxley Act ( SOX ) in 2002, followed by a important diminution after the transition of SOX. Conversely, the degree of existent net incomes direction activities declined prior to SOX and increased significantly after the pas-sage of SOX, proposing that houses switched from accrual-based to existent net incomes direction methods after the transition of SOX ” .
In the same line with Cohen et Al. ( 2008 ) , but some old ages before Graham et Al. ( 2005 ) through their research claimed that “ most net incomes direction is achieved via existent actions alternatively of utilizing accounting uses ” . Directors seemed to prefer to follow existent net incomes direction, alternatively of utilizing accrual-based use schemes in order to pull off their net incomes, despite the fact that the latter manner of direction it was likely cheaper than the first 1. Always harmonizing to the writers, the execution of SOX may be the chief ground for this switch.
2.4.1 Positive Accounting Theory
By and large, theories ‘ chief purpose is to explicate and foretell specific phenomena. The Positive Accounting Theory developed by Watts and Zimmerman in 1978 is an illustration of a peculiar positive theory of accounting. Demski ( 1988 ) states that Positive Accounting Theory is concerned with “ the full sphere of fiscal coverage activities, runing from pick of method through clip, to scrutinize agreements, to political activities ” . Harmonizing to Watts and Zimmerman ( 1978 ) , Positive Accounting Theory ( PAT ) focuses on the behaviour of directors and is concerned with describing, explicating and foretelling existent accounting patterns that they normally adopt. It besides predicts that directors are rational and choose accounting policies that are in their ain best involvement ( Watts and Zimmerman, 1986 ) . Furthermore, positive accounting theory is of import because it provides those who must do determinations and picks on accounting policy ( directors, comptrollers, investors, fiscal analysts, regulators ) with anticipations of, and accounts for, the effects of their determinations ( Watts and Zimmerman, 1986 ) .
Watts and Zimmerman ( 1978 ) based their theory on two premises. Harmonizing to the first one, persons -in our instance, top executives- normally tend to move in an timeserving mode and sing the 2nd, persons are self-interested and seek to increase their personal net income and wealth. In field words, mentioning to self-interested behaviours, we mean the instances under which CEOs and CFOs frequently try to happen ways through the use of the corporate fiscal statements in order to misdirect the shareholders/owners/investors and hike the equity-linked parts of their compensation, normally disregarding the short or long-run prosperity of the house.
Additionally, apart from the two aforementioned premises, Watts and Zimmerman developed three more hypotheses -variables- . “ These variables represent the director ‘s inducements to take accounting methods under fillip programs, debt contracts and the political procedure ” ( Watts and Zimmerman, 1990 ) . These three hypotheses are:
The fillip program hypothesis
The debt compact hypothesis
The political cost hypothesis
Harmonizing to the first one, directors with a fillip program are incentivized to maximise their personal fillip by utilizing all the appropriate accounting methods and patterns to exchange the reported net incomes from future old ages to the current twelvemonth. In that manner, and more specific, ” by describing high net income, their public-service corporation will be maximized through fillips and inducements ” ( Watts and Zimmerman, 1990 ) . Of class, it would be of critical importance to be mentioned that directors, related with a fillip program, are non ever be incentivized to increase net incomes. There are instances where director would prefer inducements for diminishing net incomes than increasing them. For case, this may go on when the fillip compensation has already been maximized and there are no more borders for farther addition.
Equally far as the 2nd hypothesis is concerned, the executives ‘ and accordingly, the corporations ‘ chief mark is to avoid, every bit much as possible, the chance of jobs with creditors. This is frequently done through the constitution of debt compacts. These are a kind of “ understanding ” between the two sides guaranting, fundamentally, that the borrower ‘s side can refund the side of the loaner. These are normally presented, for illustration, in the signifier of a specific degree of debt to equity ratio. Therefore, in instances where the houses tend to go against these debt compacts, directors have the inducement to choose accounting processs that shift reported net incomes from future periods to the current period ( Watts and Zimmerman, 1990 ) .
Finally, the last hypothesis trades with political costs. These costs are fundamentally imposed by foreigners and third-parties and may hold, for illustration, the signifier of excess revenue enhancements in instances when houses perform higher than the expected or normal, or excess costs in order to follow with new environmental Torahs. Sing the first instance, the higher the net incomes or the prosperity a steadfast face, the more attractive may be shown in the stakeholders ‘ and media attending. So, the inquiries that may look in times of high net incomes may besides make an addition in revenue enhancements and other ordinances ( Watts and Zimmerman, 1990 ) . As a effect, directors are incentivized to “ pull strings ” and postpone the reported net incomes normally by proroguing, this clip -and in contrast with
the two old hypotheses- , the current net incomes to the hereafter. By and large, we could state that the higher the political costs to the house, the more likely may be the usage of these sorts of use or of deferred accounting methods in the net incomes revelation.
2.4.2 Agency Theory
Another well-known and normally used theory correlated with net incomes direction is the Agency Theory. Agency theory “ is directed at the omnipresent bureau relationship, in which one party ( the principal ) delegates work to another ( the agent ) , who performs that work ” ( Eisenhard, 1989 ) . Jensen and Meckling ( 1976 ) specify it as “ a contract under which the principal engages the agent to execute some service on behalf which involves deputing some determination doing authorization to the agent ” . It attempts, more or less, to depict this “ bureau ” relationship utilizing the metaphor of a contract ( Jensen & A ; Meckling, 1976 ) .
A basic job that bureau theory is concerned with resolution and occurs in bureau relationships appears when stockholders hire top executives in their companies. This bureau job, as it is widely known, arises either when the desires or ends of the principal and agent struggle each other or when it is hard or expensive for the principal to verify what the agent is really making ( Eisenhardt, 1989 ) . More specific, sing the first one, in many instances the agent -in our survey, the CEO/CFO executives- does non ever move in the best involvement of the chief -shareholders- ( Jensen and Meckling, 1976 ) , while in the 2nd one, the job is that the principal can non verify that the agent has behaved suitably ( Eisenhardt, 1989 ) .
A manner to cover with this cardinal job and seek to extinguish its impact in the houses ‘ public presentation was the execution of equity inducements as an extra section, in their fixed compensation bundle, for the top executive directors. It was in the stockholders ‘ involvement to aline directions ‘ inducements with their inducements, utilizing executive compensation programs ( Jensen and Murphy, 1990 ) , making nevertheless, an sum of other “ jobs ” , such as what it was mentioned in the positive accounting theory, when executives pay attending merely to the addition of their single wealth,
alternatively of the house ‘s existent public presentation and prosperity. Besides, this is traveling to be, more or less, the major issue of research in this survey.
2.4.3 Other Theories
Apart from the two antecedently widely-known theories, there is besides a big assortment of other, more or less, comparative to net incomes direction and executives ‘ compensation theories.
First of wholly, the managerial power theory, states that managerial self-interest is what drives executives compensation and non the efficient catching ( Scott, 2009 ) . Harmonizing to Bedchuk et Al, ( 2002 ) , executives normally do non be given to move in the involvement of their stockholders, and the ground for making so is that it is a common fact that they have all the more influence in the determinations taken, sing their compensation bundles. So, by playing such an of import function on the constitution of their ain compensation, they normally facilitate their ain personal wealth at the disbursal of their stockholders.
Second, is the tourney theory. Lazear & A ; Rosen ( 1981 ) were the first who referred to this 1. Harmonizing to them, the basic factor for finding the executives ‘ compensation should be their rank in the hierarchy of the organisation and non their existent public presentation ( Lazear & A ; Rosen, 1981 ) . Henderson & A ; Frederickson ( 2001 ) besides seemed to follow the same line proposing that directors should non be paid harmonizing to their fringy end product because it is more likely to diminish their attempt and duties.
Finally, Vroom ( 1964 ) introduced the anticipation theory, foretelling 3 specific factors. First of wholly, he claims that the greater the grade that an single values a occupation wages, the bigger the motive on behalf of the person to exercise bigger attempt, practically intending that an executive increases his public presentation if his compensation is of import to him. Second, the bigger the outlook of a strong and positive relationship between attempt and public presentation, the higher the inducement to exercise bigger attempt. Finally, the higher the outlook that the compensation of the executive will be tied to his existent public presentation, the more motivated the executives will be to exercise attempt.
3. LITERATURE REVIEW
The old chapter described the theoretical background over which this survey is traveling to be based on. General features and definitions for net incomes direction and equity inducements were given, together with inside informations for the execution of SOX statute law and what assorted surveies on this topic has examined. Finally, some theories connected with executives ‘ compensation and net incomes direction were besides addressed in the last portion. In this chapter, what earlier empirical literature has examined, related on this survey, is traveling to be presented. First, there is a little debut, followed by Paragraph 3.1, where some utile information on the executives ‘ compensation plans/packages are given. Then, Paragraph 3.2 describes the relationship between these compensation plans/packages and Security and Exchange Commission ( SEC ) , while Paragraph 3.3 provide a reappraisal over the equity-based compensation and the net incomes direction, the house public presentation and the house value. Next, Paragraph 3.4 explains the association between accumulations and net incomes direction and in the terminal of this chapter, in Paragraph 3.5, the literature reappraisal, which relates the CEOs and CFOs equity inducements with net incomes direction and on which my survey is traveling to be based, is developed.
The separation of ownership and control is an ineluctable real property for big public corporations in the U.S. and abroad ( Chava and Purnanandam, 2010 ) . Based on the bureau theory, which had dealt with this separation, and more specific, the bureau job that normally arises, as this was developed antecedently in this survey, it can be easy understood that in past decennaries there was a cardinal job between the stockholders and the directors of the houses. Normally, there was a serious struggle of involvement between these two sides, frequently making jobs in the public presentation and prosperity of the house as a whole. Harmonizing to Jensen and Meckling ( 1976 ) , who analyzed these struggles between directors and stockholders, a possible solution to this bureau job and by and large this bureau costs would be an constitution of a linkage between the directors ‘ compensation and stockholders ‘ wealth. Equity-based inducements and compensations seemed to be an effectual option.
As a consequence, over the last decennaries, a dramatic addition in the equity-linked ( stock-based and option-based ) compensations took topographic point. Hall and Liebman ( 1998 ) documented that “ the average exposure of CEO wealth to tauten stock monetary values tripled between 1980 and 1994, and doubled once more between 1994 and 2000 ” . This was done, partially, in order to extenuate the concerns that directors were insulated from the houses ‘ public presentation taking to value-destroying executive behaviour, but fundamentally, holding as a primary intent to incentivize the executives to act in the stockholders ‘ will. Furthermore, through equity inducements directors are “ forced ” to set attempt in increasing company ‘s value. All these alterations in the payment-way of executives, as mentioned before, were set through the execution of compensation programs.
3.1 Executives Compensation Plans / Packages
Scott ( 2009 ) in his book ( p. 356 ) , gives an interesting and really utile definition for the compensation programs. More specific, he states that “ an executive compensation program is an bureau contract between the house and its director that attempts to aline the involvements of proprietors and director by establishing the director ‘s compensation on one or more steps of the director ‘s public presentation in runing the house ” . It is a manner to aline houses ‘ -and as a effect, stockholders as well- ends with the attempt exerted from executives.
Executives ‘ compensation bundles or programs consisted merely of a fixed wage, without any farther fillips or “ supernumeraries ” , raise significantly the chance of a high executives ‘ risk-aversion sing the firm-related determinations. This is done, because they do non hold any farther wagess and they do non desire to be personally blamed of some unsuccessful hazards they might hold taken. Therefore, harmonizing to a compensation program, an executive ‘s payment consists of two parts, a fixed portion and a variable portion. The first 1 contains his basic wage and the 2nd one contains any sort of fillips, portions or options. Shares and options were a really common manner to counterbalance house ‘s direction ( Hall and Liebman, 1998 ) . The variable portion is in topographic point to aline specific inducements between director and house ( Jensen & A ; Murphy, 1990 ) and besides, due to the fact that normally directors seem to be risk-averse, harmonizing to Gibbons ( 1998 ) , the variable portion incentivize directors to set more attempt as good and as a consequence, take more hazards because merely through this manner they will have higher
fillips. Furthermore, for the same ground, while organizing a compensation contract, it should go field and certain that more attempt consequences in higher payment to counterbalance the hazard induced upon the director ( Indjejikian, 1999 ) . In general footings we can state that the higher the inducements given to a director, the larger the sum of hazard the director is exposed to. So, based once more on Indjejikian ( 1999 ) , directors want to be rewarded, by the agencies of a higher sum of wage for the hazard taken.
However, despite the fact that these alterations were triggered by a desire to associate directors ‘ inducements with those of stockholders, recent researches showed us that besides new jobs have arisen. Armstrong et Al, ( 2010 ) claims that “ although equity retentions may relieve certain bureau jobs between executives and stockholders, concerns have arisen among research workers, regulators, and the concern imperativeness that “ high-octane ” equity inducements might besides actuate executives to pull strings accounting information for personal addition ” . This position assumes that stock monetary value is a map of reported net incomes, and that executives manipulate accounting net incomes to increase the value of their personal equity retentions ( Armstrong et al, 2010 ) .
Harmonizing to Goldman and Slezak ( 2006 ) ” stock-based compensation Acts of the Apostless like a dual edged blade ” . Connecting direction inducements to the stock monetary values may coerce directors to move in a discretional manner in describing net incomes, in order to pull strings the stock monetary values of their companies. Levitt, ( 1998 ) had cited that investors and regulators have raised concerns that certain direction inducements could take to net incomes direction, cut downing the informativeness of fiscal coverage and contributing to recent corporate dirts. Based on this Levitt ‘s province, it is non much of a surprise the fact that merely few old ages ago he came wholly true. How else could be explained that the top executives of companies such as Xerox ( 2000 ) , Enron ( 2001 ) , WorldCom ( 2002 ) and more late Lehman Brothers ( 2010 ) were accused of perpetrating deceitful activities and net incomes direction based on their discretional power on fiscal coverage. Besides Erickson et Al, ( 2006 ) more or less agreed stating that “ given the increased usage of performance-based compensation over clip and the theoretical and empirical statements of its defects, it is possible that the sensed addition in corporate fraud in the late ninetiess and early 2000s was a predictable result of these changed inducements ” .
3.2 Executives Compensation bundles and SEC
In contrast with the important alteration in the top executives ‘ compensation bundles that took topographic point over the last two decennaries, the changes in the revelation ordinances over these compensations faced a small hold. During testimony before the Senate Finance Committee, Internal Revenue Service ( IRS ) Commissioner Mark Everson expressed that the enticements of stock grasp demand “ epic ” virtuousness to maintain directors from wrongdoing ( Katz, 2006 cited by Jiang et Al, 2010 ) . Furthermore, assorted stockholders and investors started to set force per unit area on the Security and Exchange Commission ( SEC ) so as to put mandatary, elaborate and clear information revelations sing their executives ‘ payments and compensation programs. This was besides promoted after the all the more increased influence that Chief Executive Officers ( CFOs ) started to hold on the coverage of fiscal statements and besides the increased tendency which had the CFOs to get down paid with portions and stock options included in their compensations.
Echoed by these concerns and force per unit areas over the executives ‘ and more specific the CFOs ‘ turning compensations, the Security and Exchange Commission in 2006 established new revelation ordinances and regulations by necessitating the houses to unwrap together with the CEOs wage, the CFOs payments every bit good. The SEC argued that “ compensation of the chief fiscal officer is of import to stockholders because along with the chief executive officer, the chief fiscal officer provides the enfranchisements, required with the company ‘s periodic studies and has of import duty for the just presentation of the company ‘s fiscal statements and fiscal information ” ( Securities and Exchange Commission, 2006, p.117 ) .
3.3 Equity inducements and net incomes direction
As it widely mentioned in this survey, the major constituent of executives ‘ equity inducements and of their compensation bundle, as a effect, is the granting of portions, stocks and stock options to them for a better house public presentation, higher incentive alliance between directors and stockholders and an addition in the house ‘s value. The positive consequence of inducements from stock options on the leaning to misreport has of import deductions for the design of executive compensation programs
( Burns and Kedia, 2006 ) . A batch of anterior surveies have examined the relationship between these inducements and the public presentation of the house, the house value as a whole or the net incomes direction.
Jensen and Meckling ( 1976 ) foremost and besides Smith and Stulz ( 1985 ) subsequently, documented in theoretical manner that a possible greater linkage between CEO compensations and steadfast public presentation is connected with better inducement alliance -between the directors and the stockholders – and higher house values, proposing more or less that some option retentions may hold a positive influence in the house value. Normally the addition in the house value and the improved house public presentation could be achieved through the engagement in hazardous undertakings. Harmonizing to Smith and Stulz ( 1985 ) , stock options can be used to extenuate the effects of managerial hazard antipathy. As a consequence, stock options make directors to take on positive net nowadays value, hazardous undertakings ( Smith and Stulz, 1985 ) . Added to that, Morgan and Poulsen ( 2001 ) besides found some grounds back uping the positive impact that stock options have on house value. Specifically, the documented in their survey the market reacts in a positive manner in the acceptance of performance-sensitive compensation programs.
However, the inordinate usage of option may besides hold and unwanted consequences. Based on what Burns and Kedia ( 2006 ) claimed, “ the usage of stock options beyond some ”optimal ” degree might be associated with an addition in the inducements for misreporting ” . More exactly, they found that repeating firm-years are significantly associated with ”excessive ” option sensitiveness. Furthermore, this is besides in the same line with what they had stated in a anterior research few old ages ago ( Burns and Kedia, 2003 ) stating that high wage for public presentation inducements originating from stock options significantly increase the chance of restatement. Gao and Shrieves ( 2002 ) argued that contrary to the basic wage of an executive, the fillips and the sum of stock options are related in positive manner to net incomes direction. This can go more comprehensive if we take under consideration the survey from Core et Al, ( 2003 ) who gave some quite singular grounds demoing that the sum of money that come from the hard currency compensation, which in more instance is the fixed portion of a compensation program, represents less than the 10 % of the benefits that arise from the house ‘s stock options. Finally, Harris and Bromiley ( 2007 ) , cited by Armstrong et Al. ( 2010 ) suggested that the likeliness of managerial improperness rises with “ the strength of
incentives ” and hence trial for a positive relationship between the chance of accounting deceit and stock-option compensation.
The increased per centum of CEO compensation program dwelling of stock options and steadfast portions can incur great sensitiveness between directors ‘ personal wealth and house ‘s portion monetary value ( Kedia, 2003 ) . It is undoubted fact that after the connexion of their compensation bundle with the motion of the house ‘s portion monetary value, directors may be “ pushed ” to exercise more attempt to increase both steadfast value and public presentation. Following one position, this can be done in the directors ‘ effort to fulfill and increase stockholders ‘ wealth by driving the house ‘s portion monetary value upwards, but following another position, since in many instances they besides own portions of the house ( as a important portion of their compensation program ) , their inducements are besides closely related to the maximization of house ‘s portion monetary value. Therefore, this connexion may besides “ push ” them to change some valuable resources and seek to unwrap the house ‘s public presentation in a more discretional and good for them mode. That ‘s why Goldman and Slezak ( 2006 ) had claimed that stock-based compensation in many instances may move like a dual edged blade.
Bergstresser and Philippon ( 2006 ) seemed to hold with the aforesaid stating that “ equity inducements have the perverse consequence of promoting directors to work their discretion in describing net incomes, with an oculus to pull stringsing the stock monetary values of their company ” . Furthermore, another interesting position of the connexion of executives ‘ compensation and house ‘s stock monetary value was expressed by Ronen and Yaari ( 2008, p. 84 ) in their book. They tried to explicate that equity-linked compensation may besides bring on conflicting inducements to net incomes direction. Specifically, they claim that alternatively of taking merely in a short-term-horizon direction of net incomes, by seeking to increase all the more the house ‘s portion monetary value in order to derive more and more stock and option retentions, they should besides pay attending to a longer-term-horizon through the execution, sometimes, of an net incomes smoothing. This is appropriate due to the fact that after the go oning addition in the house ‘s market monetary value, through the addition of its portion monetary value, the chances and the border for even more future additions, through farther rise would be significantly limited.
Tonss of anterior surveies besides examined and found a positive relationship between net incomes direction and different constituents of executives ‘ equity inducements. For case, positive association between net incomes direction and option retentions [ ( Harris and Bromiley ( 2007 ) , Burns and Kedia ( 2006 ) ] , net incomes direction and different equity constituents, such as unvested options and stock ownership ( Cheng and Warfield, 2005 ) , and gaining direction and the full equity portfolio ( Bergstresser and Philippon, 2006 ) . By and large, it is rather apprehensible that net incomes direction and its relationship with equity inducements is much-debated and burning issue. This became clear from the assortment of the aforesaid surveies covering with it and it is traveling to go on with extra mentions in accounting literature.
Finally, in contrast with all the antecedently mentioned surveies referred to a positive relation, it would be of great importance to state that there are besides some others which are non in conformity with them. Nathan birnbaums and Kedia ( 2006 ) and O’Connor et Al. ( 2006 ) for illustration, expressed a different sentiment. They claimed that equity inducements so, by alining directors ‘ and stockholders ‘ involvements managed to cut down direction ‘s desire to acquire involved in the use of accounting and coverage Numberss and to advance it.
3.4 Accumulations and Net incomes direction
Directors who want to be involved in net incomes direction can normally make it utilizing two different methods. The first 1 is through operational use, or besides widely-known as real-earnings direction, and the 2nd one, by implementing accrual-based net incomes direction.
Roychowdhury ( 2006 ) defines existent net incomes direction as “ goings from normal operational patterns, motivated by directors ‘ desire to misdirect at least some stakeholders into believing certain fiscal coverage ends have been met in the normal class of operations ” . Furthermore, Cohen et Al. ( 2008 ) focused their survey, sing existent net incomes direction, on three use methods, ( 1 ) the acceleration of the timing of gross revenues through increased monetary value price reductions or more indulgent recognition footings, ( 2 ) the coverage of lower cost of goods sold through increased production and ( 3 ) the lessening in discretional disbursals that include advertisement
disbursal, research and development, and SG & A ; A disbursals. However, in this survey we are traveling to concentrate on net incomes direction which is chiefly based on accrual accounting.
Harmonizing to Dechow and Dichev ( 2002 ) , accounting is normally based on discretion appraisals and premises, which in most instances have to be corrected in future accumulations or net incomes. This can be one of the many grounds why accumulations are frequently used as a manner to pull off net incomes. Furthermore, since the finding of the accumulations ‘ size demands appraisals and judgements from the side of the directors, and particularly from the top degrees of the house ‘s hierarchy such as CEOs and CFOs, it can be easy understood that accruals become extremely vulnerable in use. It is widely-known that normally there is an dissymmetry in the information that stakeholders and other concern foreigners receive from the side of the corporations. That practically means that a really common phenomenon appears, when there are troubles to separate between honest appraisal mistakes and timeserving usage of accumulations, which normally aim to window-dress or misdirect the external users of the fiscal statements ( Dechow and Dichev, 2002 ) .
Dechow et Al. ( 2003 ) claim that the most popular manner for companies to pattern net incomes direction is through the use of accumulations. Accrual direction is thought to be one of the most of import discretional tools available to directors so as to temporarily hike or cut down their house ‘s reported net incomes ( Chava and Purnanandam, 2010 ) . Burgstahler and Dichev ( 1997 ) showed that accrual direction is used to diminish the volatility of the house ‘s reported net incomes, while Bergstresser and Philippon ( 2006 ) showed that CEOs with high equity-linked compensation pull off their accumulations more sharply.
Healy ( 1985 ) defines accumulations as “ the difference between reported net incomes and hard currency flow from operations ” . Since the hard currency flow can non be manipulated by the method of accrual use, the consequence can merely be affected by accommodations to accumulations. By and large, accumulations occur when there is a difference in the clip between the minute of the existent payment/receiving and the minute of the cost/revenue acknowledgment. In other words, accrual accounting distinguishes between the recording of costs and benefits associated with economic activities and the existent payment and reception of hard currency ( Palepu et al. 2010, p.7 ) . A ground why net incomes direction, based on accumulations,
is so often used may besides be the fact that houses prefer utilizing accrual accounting for fiscal studies instead than hard currency accounting. Cheng et Al. ( 1996 ) and Dechow ( 1994 ) province that the chief intent in utilizing accrual accounting is that accrual accounting lucifers grosss and disbursals better than pure hard currency flow accounting, connoting that the usage of accrual accounting could better the rating the company ‘s current public presentation every bit good as bettering appraisals sing its hereafter public presentation and future hard currency flows. Harmonizing to Palepu et Al ( 2010, p.7 ) , “ because hard currency accounting does non describe the full economic effect of the minutess undertaken in a given period, accrual accounting is designed to supply more complete information on a house ‘s periodic public presentation ” .
Entire accumulations can be decomposed into non-discretionary accrual and discretional accumulations. Non-discretionary accumulations are accounting accommodations in house ‘s hard currency flows mandated by accounting standard-setting ordinances and policies, while discretional accumulations are accommodations to hard currency flows selected by the directors. Since directors can exert some control over the discretional accumulations, these are frequently used as the placeholder for net incomes direction. Analysis of net incomes direction frequently focuses on direction ‘s usage of discretional accumulations ( Dechow et al. 1995 ) . A assortment of theoretical accounts has been developed and used in the finance and accounting literature in an effort to observe net incomes direction by utilizing accumulations ( either discretionary or non-discretionary ) such as the Healy theoretical account ( 1985 ) , the DeAngelo theoretical account ( 1986 ) , the Jones theoretical account ( 1991 ) and the Modified Jones theoretical account ( 1995 ) . However, these theoretical accounts are traveling to be examined farther subsequently in this survey.
3.5 CEOs – CFOs Equity Incentives and Earnings Management
As it is stated antecedently, over the last two decennaries a dramatic addition sing the usage of equity-linked inducements that constitute the top executives ‘ compensations programs took topographic point. In an effort to aline involvements between stockholders and directors, the execution of stock-based and option-based compensations besides raised another of import and much-debated phenomenon. The increasing job of net incomes direction. Normally, it is emphasized that executives use their personal impact and discretion on the fiscal studies by and large, and more specific on net incomes
to fulfill their ain involvements through more single net incomes, frequently at the disbursal of the house ‘s prosperity. There is a big assortment of anterior literature surveies analyzing the relation between net incomes direction and equity-based compensation.
The bulk of them concentrate on the engagement of Chief Executive Officers ( CEOs ) on the use of net incomes as the top executive in an organisation ‘s hierarchy. However, during the last old ages, even in a more limited extent, the function of the Chief Financial Officer ( CFO ) started to pull all the more attending of the regulators and their relation with the fiscal studies and the revelation of the net incomes became a affair of farther probe. Based on Fuller and Jensen ( 2002 ) , the increasing proportion of stock options in a director ‘s compensation bundle causes both CEOs and CFOs to concentrate on hiking short-run stock monetary values at the disbursal of long-term value creative activity. Furthermore, Fuller and Jensen ( 2010 ) once more, in subsequently survey, they argue that increasing the proportion of stock options in executive compensation makes the saving and sweetening of short-run stock monetary value a personal precedence for both CEOs and CFOs.
3.5.1 CEOs Equity Incentives and Earnings Management
It is mentioned antecedently, that CEOs ‘ engagement in the net incomes direction has been extremely targeted and examined by the anterior accounting literature. The ground for that is the fact that by and large, it is believed that CEO is the executive who is in charge of the house ‘s operation as a whole, having in most instances the largest compensation bundles ( which are extremely consisted of equity inducements ) and besides has the more influence on the determination devising and the house ‘s policies ( Jiang et al. 2010 ) . If we besides take under consideration that in many instances, particularly in the U.S, the CEO possesses besides the place of the president of the board of managers, which board frequently sets the CEOs compensation program or contract, so it can go comprehensive the extent of power that this executive has on its ain payment in association to the house ‘s disposal.
Returning back to the old literature, first Jensen and Murphy ( 1990 ) documented an association between CEOs inducements and stockholders wealth, stating that CEOs ‘ inducements to raise stockholders ‘ value and as a effect the house ‘s value every bit good, was limited. More specific, they found that over the period 1974-1986, CEOs stock and option portfolios ‘ value increased merely by 3 $ for every 1000 $ addition in stockholders ‘ wealth. However, it was until the 1990s when the direct exposure of CEOs wealth to the stock monetary values of their companies faced a dramatical encouragement. Hall and Liebman ( 1998 ) proved that during the period 1980-1994 when the average exposure of CEOs wealth to house ‘s value was tripled. Besides, few old ages before, Mehran ( 1995 ) had found that there is a positive relation between the house public presentation and the per centum of equity held by direction, and to the per centum of their compensation that is equity-based.
Equally far as most recent surveies are concerned, a assortment of diaries has documented the effects of equity inducements, particularly on net incomes direction. The kept up premise of this line of research is that directors can successfully blow up portion monetary values by pull stringsing fiscal statement underside lines ( Kim et al. ( 2011 ) . [ Cheng and Warfield ( 2005 ) , Bergstresser and Philippon ( 2006 ) , Burns and Kedia ( 2006 ) , and Efendi, Srivastava, and Swanson, ( 2007 ) ] , among others, have provided grounds of a positive relation between CEOs equity inducements and net incomes direction. It is of import to advert that on these 4 surveies I am traveling to chiefly establish my ain scrutiny, of class, in conformity with all the aforementioned, by the accounting literature, groundss.
Cheng and Warfield ( 2005 )
Cheng and Warfield ( 2005 ) examined the nexus between directors ‘ equity inducements ( originating from stock-based compensation and stock ownership ) and net incomes direction. Specifically, they investigated the relationship of equity inducements and the merchandising of stocks by directors and besides whether directors sell more portions after existent net incomes direction. They used stock-based compensation and stock ownership informations over the clip period 1993-2000 and as a general decision they found that equity inducements lead to inducements for net incomes direction. However, in order to make on this consequence, they foremost documented that directors with high equity
inducements sell more portions in subsequent periods and that they are more likely to describe net incomes that meet or merely all in analysts ‘ prognosiss. Furthermore, a positive relation between equity inducements and manages ‘ net hereafter gross revenues of their ain house ‘s stocks was besides found and eventually, through extra analyses, they documented that directors with high equity inducements, particularly those with systematically high equity inducements, are less likely to describe big positive net incomes surprises, consistent with net incomes smoothing.
Bergstresser and Philippon ( 2006 )
Bergstresser and Philippon ( 2006 ) examined besides the relationship between CEOs equity inducements and net incomes direction, concentrating about in the same period 1993-2001 as Cheng and Warfield ( 2005 ) did. They found grounds that companies with more ”incentivized ” CEOs ( those whose overall compensation is more sensitive to company portion monetary values ) have higher degrees of net incomes direction, explicating that these CEOs appear to more sharply use discretional constituents of net incomes to impact their houses ‘ reported public presentation. In add-on, they investigated the connexion between CEO ‘s option exercisings and portion gross revenues and the high-accrual periods, claiming that these periods coincide with remarkably important option exercisings by CEOs and unloading of portions by CEOs and other top executives. It is of import to advert that in their effort to observe the discretional accumulations, they used both a version of the Jones ( 1991 ) theoretical account and the Modified Jones theoretical account, happening the same consequences and they measured the CEOs inducements in the same manner as other old surveies had done [ ( Core and Guay, 1999 ) , ( Erickson, Hanlon, and Maydew 2006 ) , ( Burns and Kedia 2006 ) ] and as we are traveling to follow in this survey. More specific, they assessed the relation between net incomes use and the power of CEO equity-based inducements, as measured by the dollar alteration in the value of a CEO ‘s stock and options retentions that would come from a 1 % point addition in the company stock monetary value.
Nathan birnbaums and Kedia ( 2006 )
Nathan birnbaums and Kedia ( 2006 ) examined the consequence of CEO compensation contracts on misreporting. In fact, they were interested in the consequence of stock options on the acceptance of aggressive accounting patterns and that ‘s why they investigated whether and how direction ‘s inducements, through their compensation contracts, affect the likeliness of prosecuting in unusual accounting patterns that result in a restatement of fiscal statements. They compared 1,500 houses from Standard and Poor ‘s ( S & A ; P ) database that announce a restatement of their fiscal statements over the period 1995 to 2002 with those houses that do non repeat. Their consequences, more or less, were found consistent with the hypothesis they had set, which was stating that inducements from options encourage aggressive accounting patterns that result in a restatement. This was concluded due to fact that ( 1 ) strong grounds that option sensitiveness is positively associated with misreporting was found and ( 2 ) that the greater the convexness of CEO wealth to stock monetary value, the greater is the leaning to misreport. On the other manus, as extra, but less of import decisions, they documented that other constituents of CEO compensation, viz. , equity, restricted stock, long-run inducement payouts, and salary plus fillip, do non hold a important impact on the leaning to misreport, while at the same clip, the possibility of repeating houses is slightly larger and that they have higher purchase than other non-restated houses in the S & A ; P 1500.
Efendi, Srivastava, and Swanson ( 2007 )
Efendi, Srivastava, and Swanson ( 2007 ) provided grounds on CEO self-interest during the 1990s market bubble, through restated fiscal statements at the terminal of this period and particularly on restatements announced in 2000 and 2001, in an attempt to back up an overvalued stock monetary value. More specific, their survey it is a sort of extension of the previously-mentioned paper by Burns and Kedia ( 2006 ) , since they focused their survey on the association between accounting