Managers’ Stock Price Incentives and Earnings Management Using Tax Expense

• Published in: The Journal of the American Taxation Association 2024-10, Vol.46 (2), p.9-30
• Main Authors: Beardsley, Erik L., Kara, Mehmet C., Weaver, Connie D.
• Format: Article
• Language: English
• Subjects: Earnings management; Financial performance; Incentives; Risk management; Stock prices
• ISSN: 0198-9073; 1558-8017
• DOI: 10.2308/JATA-2021-006

This study examines the association between stock price incentives (portfolio delta) and earnings management using tax expense, as well as whether this association varies with opportunities to manage earnings. Prior research suggests stock price incentives provide a positive “reward effect” and a negative “risk effect,” causing managers to trade off these countervailing effects when managing earnings. We posit that greater opportunities to manage earnings alter the risk-reward tradeoff related to portfolio delta, potentially changing the association between stock price incentives and earnings management. We do not find a significant association between stock price incentives and earnings management using tax expense on average. However, the association is positive and significant when tax-related earnings management opportunities are sufficiently high, consistent with opportunities mitigating the risk effect of delta. Collectively, our results suggest that managers respond to stock price incentives differently depending on their opportunity sets. Data Availability: Data are available from the public sources cited in the text.