Nonfinancial performance measures and earnings management

Abstract

We examine the earnings management implications of using nonfinancial performance measures (NFPM) in executive compensation contracts. We argue and test that when a manager's compensation is based on financial and NFPM, he/she has less incentive to manipulate earnings to maximize compensation. Using panel data covering the period 1992–2005, we compare earnings management behavior for a sample of firms that used both financial and nonfinancial measures to a matched sample of firms that based their performance measurement solely on financial measures. The results are mainly consistent with a reduction in earnings management behavior for those firms that rely on NFPM in their compensation contracts.

Citation

HassabElnaby, H.R., Mohammad, E. and Said, A.A. (2010), "Nonfinancial performance measures and earnings management", Epstein, M.J. and Lee, J.Y. (Ed.) Advances in Management Accounting (Advances in Management Accounting, Vol. 18), Emerald Group Publishing Limited, Leeds, pp. 55-79. https://doi.org/10.1108/S1474-7871(2010)0000018006