CEO Compensation & Earnings Management

This master’s thesis has investigated the association between CEO compensation and its different components, the equity-based part and the cash-based part, with earnings management in the pre- and post-crisis period at U.S. banks. I expected to find a positive association between the two variables in both the pre- and post-crisis period. However, the results indicate that there is no significant association in place, indicating that there is no association between the two variables in the banking industry. Conform previous research, I have found that CEO compensation has decreased since the start of the financial crisis in 2007/2008. The financial crisis also shows to have an impact on earnings management, measured by the discretionary loan loss provision. The results indicate that earnings management has increased since the start of the financial crisis, compared to the period before the financial crisis. These results are in conformity with the earnings smoothing hypothesis: managers tend to use less earnings management during booming times, while more earnings management is used during economic downturn.