Executive Compensation and Earnings Management - A study of Swedish companies during the Global Financial Crisis

Abstract

This study examines the impact of executive short-term cash compensation on earnings management and how the relationship is influenced by an economic crisis, the global financial crisis. For a sample of Swedish listed firms between 2005-2012, I find evidence of a negative association between executive compensation and accruals-based earnings management, but comparing the crisis period to the period before I find a positive association that is stronger during the crisis than in the period before. However, no such association is found when comparing with the period after the crisis. I also find bonus compensation to be positively associated with overproduction of inventory. A positive association is also found between total compensation and most real earnings management models when comparing the crisis period to the period before and after. These findings indicate that the GFC influences the relationship between executive compensation and earnings management, which contributes to prior earnings management literature but also has implications for practitioners and policymakers setting the executive compensation.