Earnings management constraints in the UK and US: the moderating role of CEO compensation

The overall aim of this research is to identify the drivers of EM reduction, in order to enhance the transparency of the financial reporting process in the UK and the US contexts. This paper examines the moderating role of CEO compensation on the associations between earnings management and four factors (audit quality, institutional ownership, concentrated ownership and cash holdings). This study is a comparative analysis of the UK and the US-listed firms, between 2005 and 2016, to analyse if the moderating role of CEO compensation acts differently within the two contexts, as they both have different CEO roles and responsibilities on which different levels of compensation are granted. The study also analyses the impact of cash holdings on EM. This study reveals whether the incentive power of CEO compensation is effective, in line with the controlling power of other corporate governance mechanisms in restraining EM practices or not. After conducting the analysis, this study reveals that CEO compensation-as a moderator, doesn’t play a significant role in restraining EM practices in the UK, since none of the formed joint effects proves to be significant, even though the joint effects are observed to have negative coefficients. However, the moderating role of CEO compensation is observed to be an effective strategy in restraining EM practices within the US context, in the presence of cash holdings. So even though the presence of cash-holdings by itself in US-listed firms is found to increase the participation of EM, the positive relation changes in the intervention of CEO compensation, which indicates that the distribution of CEO compensation, in the presence of cash, acts as an incentive for managers to actually work for the firms’ best interests, and avoid using the firms’ excess cash, leading to lower levels of EM.