The Relationship between Bonus of employee and Earnings Management
Date Issued
2008
Date
2008
Author(s)
Chang, Chen-Chen
Abstract
This paper examines two research issues. The first one is the link between manager’s expectancy of the rate of employee bonus and earnings management; the second one is the difference of intensity of earnings management from manager’s expectancy of the rate of employee bonus between the electronics industry and non- electronics industry. The rate of employee bonus is defined as the proportion of employee bonus to retained earnings. Using data obtained from Taiwan Economics Journal (TEJ) and Market Observation Posting System (MOPS) for the period 2002-2004. We consider four specifications of discretionary accruals as a proxy for earnings management that includes the absolute value of DAit (Discretionary Accruals) from Modified Jones Model (1995), the absolute value of DCAit (Discretionary Current Accruals) from Teoh et al.(1998) and the absolute value of PADCAit (Portfolio Performance Adjusted Discretionary Current Accruals) and REDCAit (ROA in Estimation Discretionary Current Accruals) from Ashbaugh et al.(2003). We provide the average rate of employee bonus from previous three years as a proxy for manager’s expectancy of the rate of employee bonus to examine the association between manager’s expectancy of the rate of employee bonus and the four measures of earnings management.he empirical results show that there is no significant alliance between the average rate of employee bonus and earnings management in four measures in all samples. However, after we split all sample into two sub-samples, the electronics industry and non- electronics industry, and conduct the same analyses, we found that the average rate of employee bonus is positively and significantly associated with earnings management in four measures in the electronics industry, but it has no significant association with earnings management in four measures in the non- electronics industry.
Subjects
employee bonus
earnings management
discretionary accruals
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