Equity incentives and earnings management

This master’s thesis examines the relation between equity incentives and earnings management. It extends prior research by providing a more detailed insight on the relation between discretionary accruals and equity incentives. The study finds evidence for a significant relation between discretionary accruals calculated by a linear Kothari accrual model and equity incentives, in a pre‐Sarbanes Oxley sample. It shows that this relation is stronger for CFO equity incentives than for CEO equity incentives. The study finds a significant positive relation between earnings management and total equity incentives; it also shows such a positive relation for option‐based equity incentives. For stock‐based equity incentives no such positive relation is found. The third finding is that the relation between earnings management and equity incentives changes before and after the major accounting scandals and introduction of the Sarbanes Oxley act.