The impact of earnings per share targets in executive remuneration contracts on company accounting choices

This study concerns itself with executive share option plans that have earnings per share targets and examines whether the existence of such vesting criteria results in opportunistic behaviour by managers or represents efficient contracting. Accounting choices by management are studied to see whether earnings per share targets in various executive remuneration components are associated with (1) the disclosure of alternative earnings per share, (2) earnings management defined as abnormal working capital accruals and (3) earnings management defined as meeting or beating analysts' forecasts. To begin with, the current study tests for an association between the disclosure of alternative earnings per share figures and earnings per share performance criteria in executive share options. Following Healy (1985) it is argued that situations might exist where executives are aware they will not meet the target or will overshoot the target giving rise to incentives to manage earnings downwards. There are also situations where executives expect to miss the target but have incentives (and scope) to manage earnings upwards. The study then proceeds to measure earnings management using a modified Jones (1991) model. A proxy for target growth in earnings per share is developed. The third and final section of the current study considers meeting or beating analysts' forecasts as the earnings management metric. Prior research provides evidence that meeting or beating analysts' forecasts is rewarded by the stock market and as the payout from executive share options is linked to share price, executives have incentives to meet or beat analysts' forecasts.Regression analysis, in the form of either logit or ordinary least squares is employed in all three sections of this study. The results suggest that earnings management is associated with earnings per share vesting targets in executive share option plans. Moreover, the findings as a whole suggest that the introduction of earnings per share targets as a vesting criterion in executive share options resulted in opportunistic behaviour by management.This thesis adopts an agency theory framework and contributes to the literature on corporate governance and executive remuneration by identifying a specific contractual setting where management is especially sensitive to reported earnings numbers. This particular setting is novel. Additionally, the research design facilitated the testing of whether or not executive share options with an earnings per share growth target result in opportunistic behaviour on the part of managers or represent efficient contracting.EThOS - Electronic Theses Online ServiceGBUnited Kingdo