Journal of Commerce and Accounting Research

Ranjitha Ajay ¹, R. Madhumathi ²

Affiliations
1 Great Lakes Institute of Management Chennai, Tamil Nadu, IN
2 Professor, Department of Management Studies, Indian Institute of Technology Madras, Chennai, Tamil Nadu, IN

Abstract

We examine whether executive compensation influences the earnings management activities in a firm. Earnings management is broadly classified as accrual management and real earnings management. Information asymmetry between managers and shareholders provides the incentive to the former to manage earnings for their personal benefits. We find that a higher compensation ratio reduces accrual management (discretionary accruals) and real earnings management, which contradict the findings of Shuto (2007), and Adut et al. (2013). This show that managerial compensation improves the earnings quality of firms. The information asymmetry hypothesis is evident in firms, wherein increasing firm performance increases tax accruals that reduce firm value. The study identifies the threshold limits of earnings management with different levels of executive compensation by classifying the data into full sample and sub sample (overvalued and undervalued firms). Undervalued firms tend to have higher executive compensation as the level of earnings management (discretionary accruals and real earnings management) increases first to mimic the reporting strategies of overvalued firms and then subsequently as a tax planning strategy to improve firm value.

Keywords

Earnings Management, Executive Compensation, Discretionary Accruals, Earnings Smoothing, Real Earnings Management

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A. Karen Nisha ¹, R. Madhumathi ²

Affiliations
1 Research Scholar, Department of Management Studies, Indian Institute of Technology Madras, Chennai, Tamil Nadu, IN
2 Professor, Department of Management Studies, Indian Institute of Technology Madras, Chennai, Tamil Nadu, IN

Abstract

Time’ and ‘value’ are the huge assets used by banks in risk management. This paper investigates the time-varying impact on the value of banks’ asset-liability positions to the macroeconomic fluctuations in the bank risk factors, such as interest rate risk, credit risk, foreign exchange risk, and equity risk. The value positions of 110 Indian commercial banks, including foreign banks, at various asset-liability maturity patterns are considered for measuring their position exposures. Results show that bank deposits, bank investments, and loans and advances are highly significant to all the risk factors, while decisions on bank borrowings and hedge policies are based on the internal regulatory requirements. Hence, they are significant only with the interest rate risk factor. Deposits with a maturity period of 15-28 days; 29 days to three months; and over three to six months have shown high sensitivity, which might indicate the risk averse nature of bank clients with immediate liquidity requirements. This indicates deteriorating credit conditions, signalling an increase in the probability of default, which decreases the economic value of the deposits. The same bank deposits with a highly negative significance to equity risk supports the portfolio rebalancing activities of clients, from illiquid low-return long-term investments to liquid high-return market portfolios, as hypothesised in recent banking literature. The study reports that maintaining a safe level of maturity management and predicting risk tolerance levels are the best ways for banks to devise proper risk management approaches.

Keywords

Bank Risk Exposure, Position Exposures, Maturity Pattern, Time-varying Impact, Corporate Risk Management

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