CEO Pay Slice and Earnings Manipulation in Overvalued Companies

Both the magnitude and signs of discretionary accrual (DACC) should be considered when examining its impact on firm-specific risk. In this study, we show that only overvalued firms that have positive DACC exhibit low firm-specific information and high price crash risk. We also investigate whether corporate governance affects the earnings management decisions of overvalued firms. Among all the variables we examine, CEO pay slice (CPS) has the strongest power in predicting overvalued firms’ earnings management choice, followed by monitoring intensity and information asymmetry measures. We also find that the passage of SOX plays a positive role in controlling the “value-destroying forces” set in motion by equity overvaluation and firms are more likely to use DACC for informational purpose after the passage of SOX.