Discussion of earnings-based bonus plans and earnings management by business unit managers

Abstract

Guidry, Leone, and Rock use business unit data from a multinational conglomerate to reexamine whether earnings-based bonus plans are associated with earnings management. By focusing on business unit compensation, the authors increase the power of the tests and control for earnings management incentives provided by stock-based compensation. Questions raised by the study include the generalizability of the findings beyond the sample firm, the economic significance of earnings management, the effect of earnings management on bonus awards, and how group-level incentives to manage earnings interact with incentives at the business unit level.