Expensing Employee Bonus Compensation and Earnings Management:The Role of Corporate Governance

• Main Authors: Chang-Peng Lu, 盧常朋
• Other Authors: Shing-jen Wu
• Format: Others
• Language: zh-TW
• Published: 2011
• Online Access: http://ndltd.ncl.edu.tw/handle/41831846591165118706

碩士 === 東吳大學 === 會計學系 === 99 === In Taiwan, employee bonus has requested to be recognized as an expense instead of to be the earnings distribution for all the listed companies since January 1, 2008. This new accounting treatment policy resulted in income decreasing, and will probably give the managers' incentive to manage earning upward. Therefore, the purpose of this study is to examine whether expensing employee bonus induce managers' earnings management to avoid earnings downward. In addition, this study also investigates the effect of corporate governance mechanisms on this potential earnings management behavior. Specifically, I predict that strong corporate governance could mitigate expensing bonus-induced earnings management. I use discretionary accruals and a comprehensive measure of real earnings management activities (including the abnormal levels of cash flow from operations, discretionary expenses, and production costs) to proxy for managers' earnings management behaviors, respectively. Besides, I also use a comprehensive index which is measured by two dimensions—board composition and ownership structure, to capture the effectiveness of corporate governance. Using a sample of firms listed on the TSE or trading on Taiwan's OTC market from 2006 to 2009, the empirical results show that managers indeed adopt discretionary accruals or real earnings management activities to manipulate earnings achieving earnings targets after expensing employee bonus. The amounts of employee bonus increases, the magnitude of accrual-based / real earnings management increases. Furthermore, the results indicate that better corporate governance can effectively mitigate the accrual-based earnings management. However, this study cannot find evidence support the effect of corporate governance on real earnings management of expensing employee bonus.