An International Analysis of Director Equity Incentives and Earnings Management

Abstract

Using data from 29 countries, we find that firms whose directors awarded higher percentage equity based compensation are associated with greater use of earnings management. Such positive relation persists regardless whether a director serves on the audit committee, or whether a director is an independent or inside director. However, this association is reversed at firms with greater board or audit committee independence. Finally, using a matched sample of ADRs and non-ADRs, we show that although ADRs exhibit less earnings management relative to non-ADRs, having an ADR does not deter the attempt of directors with high equity incentives to manipulate earnings.