Executive variable compensation, earnings management, and analysts’ coverage; Empirical evidence in an emerging market

Resumen

This study aims to analyze the moderating effect of analyst coverage on the relationship between executive variable compensation (i.e., profit-sharing and share-based compensation) and earnings management practices in an emerging market. The analyses are based on a sample of Brazilian-listed firms covering the years between 2010 and 2023. We consider the absolute amount of discretionary accruals as a proxy for earnings management. Analyst coverage is measured by the number of analysts who follow the firms, while the executive variable compensation is estimated by hand-collected data related to the percentage of remuneration for both profit-sharing and share-based compensation. The results suggest that only variable compensation incentives for profit-sharing can induce managers to adopt higher levels of earnings management; we find no evidence taking into account share-based compensation. Moreover, our results also reveal that the coverage of financial analysts does not play a role in this relationship, not influencing the effect of variable compensation on earnings management in the Brazilian capital market. The results complement previous literature on earnings quality and executive compensation in emerging markets by disentangling the executive variable compensation in two different incentives (i.e., short-term and long-term incentives) – offering a larger picture of the association between the two constructs.