Executive Equity Compensation Drives Earnings Inflation

The economic crisis of 2008 put a bright spotlight on executive compensation and its effects on the behavior of top management. The critics have pointed to the unprecedented escalation in executive compensation, drawing a direct link to deteriorating business ethics, widespread excesses and abuses of power, and the lack of regard for customers’ and shareholders’ welfare.

We examine the effects of executive compensation on a specific type of mismanagement: myopic management (i.e., real activity manipulation, like cutting R&D and advertising spending, with the intent to artificially inflate current earnings).

Empirical research in accounting and other business disciplines has shown that … Read more