Does the executive labor market discipline? Labor market incentives and earnings management |
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| Institution: | 1. Keck Graduate Institute, Claremont Colleges, 535 Watson Drive, Claremont, CA 91711, United States of America;2. The University of Texas at Dallas, JSOM 14.502, 800 West Campbell Road, Richardson, TX 75080-3021, United States of America;3. Sabanci University, Orta Mahalle Universite Caddesi No: 27, 34956, Tuzla/Istanbul, Turkey;4. University of Memphis, 3675 Central Ave, FAB442, Memphis, TN 38152, United States of America;1. Eller College of Management, University of Arizona, 1130 E. Helen St., Tucson, AZ 85721, USA;2. Sauder School of Business, University of British Columbia, 2053 Main Mall, Vancouver, BC V6T1Z2, Canada;3. Haslam College of Business, University of Tennessee, 916 Volunteer Blvd., Knoxville, TN 37996, USA;4. School of Management, State University of New York at Binghamton, 4400 Vestal Parkway East, Binghamton, NY 13902, USA |
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| Abstract: | This paper investigates the role of outside options in the executive labor market on earnings management decisions. To proxy for executives’ outside options, we use the number of times other firms cite the executive’s firm as a compensation peer. We find that executives with more citations conduct less earnings management. Exploiting the 2006 SEC requirement for compensation peer disclosure as a quasi-natural shock to executives’ awareness of outside options, we show that the executives who should be more responsive to outside options significantly reduce earnings management. Cross-sectional tests support a labor market discipline channel of outside options. Finally, we exploit state-level recognition of Inevitable Disclosure Doctrine and enforcement of non-compete agreements as cross-sectional restrictions on labor mobility and show that the impact of peer citations on reducing earnings management is stronger when there are fewer restrictions on mobility. |
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| Keywords: | Executive incentives Earnings management Compensation peer |
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