CEO duality, CEO compensation, and earnings management: Evidence from China

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Abstract

This paper investigates whether chief executive officer (CEO) duality and CEO compensation influence earnings management. We obtain the data of the A-shares companies listed in both the Shanghai Stock Exchange (SSE) and Shenzhen Stock Exchange (SZSE) from the Chinese Securities Market and Accounting Research (CSMAR) database. Using a sample of 8,419 firm-year observations of 881 unique listed companies in China from 2011–2022, we find that the firms with CEO duality exhibit a higher level of earnings management, through both discretionary accruals and real activities. In addition, CEOs with higher cash-based compensation are more likely to engage in earnings management, while CEOs with higher equity-based incentives are less likely to engage in real earnings management. We further examine the moderating role of CEO duality and find that CEOs who also chair the board are more likely to engage in real earnings management. Additional analysis shows that state-owned companies are less likely to engage in earnings management activities. However, equity-based compensation provides incremental incentives for the CEOs of state-owned companies to manage earnings through accruals rather than real activities.

Keywords: CEO Duality, CEO Compensation, Earnings Management

Authors’ individual contribution: Conceptualisation — J.B. and C.X.; Methodology — J.B. and C.X.; Formal Analysis — J.B.; Writing — Original Draft — J.B.; Writing — Review & Editing — J.B. and C.X.; Supervision — C.X.; Funding Acquisition — C.X.

Declaration of conflicting interests: The Authors declare that there is no conflict of interest.

JEL Classification: G12, G32

Received: 14.04.2023
Accepted: 21.07.2023
Published online: 25.07.2023

How to cite this paper: Bao, J., & Xue, C. (2023). CEO duality, CEO compensation, and earnings management: Evidence from China [Special issue]. Corporate Ownership & Control, 20(3), 317–327. https://doi.org/10.22495/cocv20i3siart7