This report analyzes the relationship between executive compensation and contract-driven earnings management, drawing on agency theory and positive accounting theory. It reviews the impact of early executive compensation models, the bonus plan maximization hypothesis, and equity-based incentives. The report highlights the conflict of interest between managers and shareholders, emphasizing how compensation contracts aim to align managerial actions with shareholder interests. It also discusses how managers may engage in opportunistic earnings management to maximize their compensation, either through bonus plans or stock options. Ultimately, the report concludes that compensation contracts, while intended to improve performance, can also incentivize managers to manipulate earnings and stock prices to increase their rewards. Desklib provides access to this and other solved assignments to aid in student learning and research.
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