Three essays on earnings management and executive compensation.

This dissertation is comprised of three papers on corporate earnings management and executive compensation. Chapter 1 is a critique of the literature linking higher CEO pay-for-performance to more earnings management. The result has been elevated to the status of a stylized fact, since it is robust to a large variety of measures for incentives and earnings management. I argue that the studies do not effectively isolate the effect of incentives from their determinants. Analogously to propensity scoring, I match observations on CEOs' predicted pay-for-performance sensitivities and find no effect of incentives on earnings management in those matched groups. The paper is a methodological contribution to the literature on earnings management, because it is the first to use the method of propensity scoring to control for confounding effects. In chapter 2, I explore the possibility that current shareholders encourage CEOs to manage earnings around equity issuances, as artificially inflated stock prices allow shareholders to obtain external financing at lower cost. My main result establishes that CEOs in well-governed firms are more likely to have large positive discretionary accruals around equity issuances than CEOs in poorly-governed firms. The finding suggests that governance is a double-edged sword: good governance may limit misreporting when it hurts current shareholders, but it may exacerbate misreporting when current shareholders stand to benefit. Chapter 3 is a theoretical contribution to understanding the size and structure of CEO pay. The analysis is cast in the shirking model of efficiency wages, but assumes that profits accrue to the CEO. As the CEO effectively sets his own pay, the moral hazard problem of shirking becomes one of repayment. Pay for performance arises from shareholders' inability to fully extract firm profits rather than from their desire to align interests. Nevertheless, shareholders may be better off under managerial skimming than under efficiency wages, because skimming overcomes the commitment problem to discretionary pay-for-performance.Ph.D.AccountingEconomicsFinanceSocial SciencesUniversity of Michigan, Horace H. Rackham School of Graduate Studieshttp://deepblue.lib.umich.edu/bitstream/2027.42/126042/2/3224894.pd