Target Ownership Plan and Earnings Management

53 Pages Posted: 26 Nov 2014 Last revised: 9 Dec 2014

See all articles by Kareen Brown

Kareen Brown

Brock University - Goodman School of Business

Changling Chen

University of Waterloo - School of Accounting and Finance

Duane B. Kennedy

University of Waterloo - School of Accounting and Finance

Date Written: November 19, 2014

Abstract

We examine the determinants of target ownership plans and their association with earnings management. We find that firms adopt target ownership plans not only in response to poor performance as documented by prior research, but also as a means to mitigate moral hazard concerns and in response to peer pressure. Our analyses show that firms engage in less accruals and real earnings management for up to two years following plan adoption. Additionally, we find that the reduction in accruals management is concentrated in adoption firms that have met the target ownership requirements, and in high probability adoption firms whose adoption decisions are driven by performance, moral hazard, governance, capital market, and peer-firm concerns. Our findings support the argument that target ownership plans align CEOs’ incentives with shareholders’ in that these plans result in reduced management short-termism as evidenced by more truthful earnings reporting and less real earnings management through production cost manipulation and discretionary expenditures.

Keywords: Target Ownership Plans, accruals management, real earnings management

JEL Classification: M41

Suggested Citation

Brown, Kareen and Chen, Changling and Kennedy, Duane B., Target Ownership Plan and Earnings Management (November 19, 2014). 2015 Canadian Academic Accounting Association (CAAA) Annual Conference, Available at SSRN: https://ssrn.com/abstract=2528152 or http://dx.doi.org/10.2139/ssrn.2528152

Kareen Brown

Brock University - Goodman School of Business ( email )

500 Glenridge Avenue
International Business and Strategy
St. Catherine's, Ontario L2S 3A1
Canada

Changling Chen

University of Waterloo - School of Accounting and Finance ( email )

200 University Avenue West
Waterloo, Ontario N2L 3G1 N2L 3G1
Canada

Duane B. Kennedy (Contact Author)

University of Waterloo - School of Accounting and Finance ( email )

200 University Avenue West
Waterloo, Ontario N2L 3G1
Canada
519-888-4752 (Phone)

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