Professor Cheng will discuss three related papers that examine the dynamic relationship between managers' equity incentives - stock-based compensation and stock/option holdings - and earnings management. Cheng and Warfield (2005) hypothesize that managers with high equity incentives are more likely to sell shares in the future and this motivates these managers to engage in earnings management to increase the value of the shares to be sold. Consistent with these predictions, the paper documents that manager with high equity incentives sell more shares in subsequent periods and are more likely to report earnings that meet or just beat analysts' forecasts. Cheng, Warfield, and Ye (2009) extend the analyses to the banking industry. It documents that bank managers with high equity incentives are more likely to manage earnings, but only when capital ratios are closer to the minimum regulatory capital requirements. Built on these and other related studies, Cheng and Farber (2008) investigate whether firms that experience earnings restatements recontract with their CEOs to reduce their option-based compensation in order to reduce the earnings management incentives. It finds that the proportion of CEOs' compensation in the form of options declines significantly in the two years following the restatement. Furthermore, this reduction is accompanied by a decrease in the riskiness of investments and subsequent improvements in operating performance. Collectively, these papers demonstrate stock-based compensation and holdings can lead to earnings management incentives. After the revelation of earnings management, the board of directors changes the design of compensation contract to mitigate such incentives. Download Paper Paper">http://www.accountancy.smu.edu.sg/research/seminar/pdf/QiangCHENG_paper1... 1 Paper">http://www.accountancy.smu.edu.sg/research/seminar/pdf/QiangCHENG_paper2... 2 Paper">http://www.accountancy.smu.edu.sg/research/seminar/pdf/QiangCHENG_paper3... 3
| Speaker: | Dr Qiang CHENG Associate Professor, University of Wisconsin-Madison |
| When: |
2.00 pm - 3.30 pm |
| Venue: | School of Accountancy [Map] Level 4, Meeting Room 4.1 |
| Contact: | Office of the Dean Email: SOAR@smu.edu.sg |