Managerial ability and the relationship between executive compensation and earnings management
Abstract
The primary purpose of this research was to analyze the role of managerial ability in the relationship between executive compensation and earnings management. Secondarily, it was also analyzed whether managerial ability is associated with: i) relatively high levels of executive compensation; and ii) mitigating earnings management practices. For the empirical tests, a sample of 1,296 observations from non-financial firms listed in B3 in the period from 2010 to 2018 was considered. To obtain the results, managerial ability was measured following Demerjian et al. (2013), as a proxy for earnings management, discretionary accruals was used and, finally, as a proxy for executive compensation, the natural logarithm of executive variable compensation was used. Empirical evidence was captured using the linear regression models, using panel data, with sector and year fixed effects. The main results suggest that managerial ability is positively related to executives' variable compensation and negatively related to discretionary accruals. The evidence from this research may contribute towards demonstrating that managerial ability is a characteristic capable of reducing the incentive to manipulate results with a view to increasing variable remuneration, since more managerial ability can achieve their goals more easily through their competence, without the need to use opportunistic practices.
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