The Effect of the Global Financial Crisis on Earnings Management and Executive Compensations: UK Evidence

نوع المستند : المقالة الأصلية

المؤلف

Faculty of Commerce, South Valley University

المستخلص

The research questions of the present paper have been motivated by the Global Financial Crisis (GFC) that hit almost the whole globe in 2007-2008. The purpose of the current study is to examine the effect of the global financial crisis on the level and direction of earnings management during crisis period as well as the effect of this crisis on the level and structure of executive compensation during the same period using a sample of the UK FTSE 350 nonfinancial companies. Regarding the effect of global financial crisis on earnings management practices; the results showed that firms engaged in higher levels of earnings management. More specifically, the findings revealed that firms managed earnings downward during the crisis period. These results are consistent with the argument that firms may have recourse to income decreasing earnings management during crisis periods to gain governmental aid, relax debt covenant and lower interest rates. With regard to the impact of the GFC on executive compensation, the results indicated that the sample firms provided less total compensations during the crisis period; however firms offer higher salaries, bonus, and direct compensations. Surprisingly, the results show that CEO’s ownership increased during the crisis period, implying that they could not anticipate the financial crisis. Moreover, the study reported that the quality of corporate governance system of the sample companies does not have a significant effect on earnings management practices or on the level and structure of executive compensations during the crisis period.
To the best of the author’s knowledge, this paper is one of the first papers that examine the impact of the GFC on earnings management and executive compensations using UK data, as most of the extant literature have been undertaken in the US. Although both countries represent the Anglo-American model of corporate governance, the UK has a different institutional environment regarding many aspects of executive compensation. Therefore, the results of US studies cannot be generalised to the UK. The current paper also provides up-to-date evidence regarding the implications of the GFC on earnings management and executive compensations. The results presented in the current study provide more understanding of the consequences of financial crises on earnings management and executive compensations, especially with the absence of any consensus in this regard.

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