Earnings Smoothing, Executive Compensation, and Corporate Governance: Evidence From the Property–Liability Insurance Industry

Earnings Smoothing, Executive Compensation, and Corporate Governance: Evidence From the Property–Liability Insurance Industry

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Article ID: iaor201112127
Volume: 78
Issue: 3
Start Page Number: 761
End Page Number: 790
Publication Date: Sep 2011
Journal: Journal of Risk and Insurance
Authors: , , , ,
Keywords: insurance
Abstract:

Unlike studies that estimate managerial bias, we utilize a direct measure of managerial bias in the U.S. insurance industry to investigate the effects of executive compensation and corporate governance on firms’ earnings management behaviors. We find managers receiving larger bonuses and stock awards tend to make reserving decisions that serve to decrease firm earnings. Moreover, we examine the monitoring effect of corporate board structures in mitigating managers’ reserve manipulation practices. We find managers are more likely to manipulate reserves in the presence of particular board structures. Similar results are not found when we employ traditional estimated measures of managerial bias.

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