Earnings Management and Executive Compensation: Evidence from Banking Industry

This paper suggests that fraudulent companies share characteristics with companies engaged in earnings management. Thus, a mechanism could exist to detect fraudulent activities, using the Fraud Triangle in SAS 99. Empirically, I examine the association between bank executives’ incentives and earnings management, and find that stock options of bank executives are significantly and positively associated with the earnings management of their banks. In addition, larger, poorer performing banks with a lower number of outside blockholders manipulate their financial reports more through provision-for-loan-loss accounts. Overall, the findings might lead to new regulatory changes in the banking industry for early fraud detection.