We document insider opportunism in an insolvency regime that is characterized by weak creditor rights and uses an accounting rule to determine bankruptcy eligibility. Using a unique dataset of bankrupt firms from India, we show insiders manage earnings downward before filing for bankruptcy via inventory and trade receivable accruals. A battery of robustness tests confirm accrual behavior is not merely driven by poor performance. Downward earnings management before bankruptcy filing is associated with more payment transactions to insiders post-bankruptcy. Low pre-bankruptcy accruals are associated with poor post-filing performance as well as greater loss of market value on bankruptcy announcement. Our results are consistent with insiders gaming the accounting-based entry rule to obtain bankruptcy protection and extracting private benefits from bankrupt firms. Our study highlights the importance of strong creditor rights for generating positive economic outcomes (La Porta et al. (1997)).
{"title":"Weak Creditor Rights and Insider Opportunism: Evidence from an Emerging Market","authors":"R. Gopalan, Xiumin Martin, K. Srinivasan","doi":"10.2139/ssrn.3010001","DOIUrl":"https://doi.org/10.2139/ssrn.3010001","url":null,"abstract":"We document insider opportunism in an insolvency regime that is characterized by weak creditor rights and uses an accounting rule to determine bankruptcy eligibility. Using a unique dataset of bankrupt firms from India, we show insiders manage earnings downward before filing for bankruptcy via inventory and trade receivable accruals. A battery of robustness tests confirm accrual behavior is not merely driven by poor performance. Downward earnings management before bankruptcy filing is associated with more payment transactions to insiders post-bankruptcy. Low pre-bankruptcy accruals are associated with poor post-filing performance as well as greater loss of market value on bankruptcy announcement. Our results are consistent with insiders gaming the accounting-based entry rule to obtain bankruptcy protection and extracting private benefits from bankrupt firms. Our study highlights the importance of strong creditor rights for generating positive economic outcomes (La Porta et al. (1997)).","PeriodicalId":270398,"journal":{"name":"Accounting: Financial Accounting","volume":"4 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2017-08-04","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126526340","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We study how compensation committees set CEOs’ earnings performance goals in annual incentive plans (AIPs) and their implications for managers’ strategic earning guidance behavior. We find corporate boards rely on earnings forecasts provided by both financial analysts and managers in setting performance goals. Also, the weight boards place on a manager’s earnings forecasts increases with managers’ information advantage over analysts. We next examine the implications of this process for management earnings guidance. We find that the forecasts issued by management ahead of compensation committee meetings (“event-window guidance”) are more pessimistic than those issued at other times. This pessimism in event-window earnings guidance is present when performance goals are linked to earnings-based measures such as Earnings-Per-Share (EPS), but not when they are linked to revenue, suggesting that pessimistic event-window guidance is likely motivated by a desire to depress earnings performance goals. Furthermore, pessimism in event-window guidance is associated with higher bonus payouts as well as total payouts to CEOs. Lastly, meeting or beating performance goals significantly reduces the likelihood of forced CEO turnover. Overall, this study provides insights into the process of setting managerial performance goals and management’s strategic disclosure behavior arising from this process.
{"title":"Target Performance Goals in CEO Compensation Contracts and Management Earnings Guidance","authors":"Xiumin Martin, Hojun Seo, Jun Yang, D. Kim","doi":"10.2139/ssrn.2931372","DOIUrl":"https://doi.org/10.2139/ssrn.2931372","url":null,"abstract":"We study how compensation committees set CEOs’ earnings performance goals in annual incentive plans (AIPs) and their implications for managers’ strategic earning guidance behavior. We find corporate boards rely on earnings forecasts provided by both financial analysts and managers in setting performance goals. Also, the weight boards place on a manager’s earnings forecasts increases with managers’ information advantage over analysts. We next examine the implications of this process for management earnings guidance. We find that the forecasts issued by management ahead of compensation committee meetings (“event-window guidance”) are more pessimistic than those issued at other times. This pessimism in event-window earnings guidance is present when performance goals are linked to earnings-based measures such as Earnings-Per-Share (EPS), but not when they are linked to revenue, suggesting that pessimistic event-window guidance is likely motivated by a desire to depress earnings performance goals. Furthermore, pessimism in event-window guidance is associated with higher bonus payouts as well as total payouts to CEOs. Lastly, meeting or beating performance goals significantly reduces the likelihood of forced CEO turnover. Overall, this study provides insights into the process of setting managerial performance goals and management’s strategic disclosure behavior arising from this process.","PeriodicalId":270398,"journal":{"name":"Accounting: Financial Accounting","volume":"35 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2017-03-11","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127593190","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
ABSTRACT We study firms' investment in internal controls to reduce accounting manipulation. We first show that peer managers' manipulation decisions are strategic complements: one manager manipulat...
{"title":"Accounting Manipulation, Peer Pressure, and Internal Control","authors":"Pingyang Gao, Gaoqing Zhang","doi":"10.2139/ssrn.2767829","DOIUrl":"https://doi.org/10.2139/ssrn.2767829","url":null,"abstract":"ABSTRACT We study firms' investment in internal controls to reduce accounting manipulation. We first show that peer managers' manipulation decisions are strategic complements: one manager manipulat...","PeriodicalId":270398,"journal":{"name":"Accounting: Financial Accounting","volume":"54 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-04-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129480013","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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