CEO Risk-taking Incentives and Financial Reporting
This dissertation consists of two essays that analyze the role of CEO equity risk-taking incentives in financial reporting. The first essay examines the relationship between executive risk-taking incentives and four temporal properties of earnings, including: volatility, persistence, predictability, and accruals quality. The second essay analyzes executive equity risk-taking incentives as a moderator for the relationship between earnings manipulation and stock market-based transactions.
I measure CEO equity risk-taking incentives as the sensitivity of CEO wealth to changes in stock volatility. The second essay explores accruals earnings management and real activities manipulation surrounding CEO option exercises and option grants. In both essays I deploy fixed-effect models, instrumental variables, and simultaneous equation models to control for possible endogeneity.
I find that CEO vega is positively associated with earnings volatility. Predicted values of vega, estimated using determinants of vega from prior research, appear to be positively associated with earnings predictability. However, actual values of vega that exceed the predicted values of vega appear to lead to decreases in earnings predictability. I find that vega is negatively associated with short-term earnings persistence, and this association is primarily driven by a decrease in the persistence of accruals. Finally, using the Dechow and Dichev (2002) accrual quality metric, I find a negative relationship between CEO and accrual quality.
In the second essay, I find that CEO's with high levels of vega exercise fewer options during and following periods of high income increasing earnings management and engage in less downwards earnings management in periods preceding fixed-date option grants.