Constraints of Real Earnings Management with Moderating Role of CEO Compensation and Audit Quality: Evidence from US

Abstract

Abstract

This research delves into the influence of multiple constraints—auditor-client distance, employee tenure, corporate governance, IFRS adoption, geographical location, and corporate tax avoidance—on real earnings management (REM) within the United States, with a particular focus on the moderating impacts of CEO compensation and audit quality. Leveraging panel data sourced from non-financial firms in the S&P 500 index spanning January 2006 to December 2020, the study employs robust statistical tests to assess data normality. To address potential endogeneity concerns, the research adopts the GMM-Arellano bond model as the most suitable regression estimator. Findings reveal that auditor-client distance positively influences REM, contrasting with the negligible impact of employee tenure. Furthermore, stronger corporate governance, IFRS adoption, and reduced corporate tax avoidance correlate with diminished REM practices. Notably, CEO compensation demonstrates a positive moderation effect on REM, while enhanced audit quality aligns with reduced REM, echoing the tenets of agency theory and underscoring the pivotal roles of governance and audit quality in shaping REM behaviors.

     Keywords: accrual earnings management (AEM), real earnings management (REM), CEO compensation, audit quality (AQ), auditor client distance (ACD), employee tenure (ET), corporate governance index (CGI), IFRS, geographical location (GL), corporate tax avoidance (CTA), S&P 500-index.