The Impact of Executive Pay and Executive Power on Earnings Management in India

Purpose: To examine whether, and the extent to which, executive pay and executive power impact earnings management (EM) behaviour in India. Design/Methodology/Approach: The study applies the modified version of Jones’s (1991, Journal of Accounting Research , 29 (2), 193–228) model propounded by Dechow et al. (1995, The Accounting Review , 70 (2), 193–225) to measure the proxy for accruals-based EM and the Roychowdhury’s (2006, Journal of Accounting and Economics , 42 (3), 335–370) model to measure real EM in 980 listed companies in India during the period 2008–2022. Findings: The study reveals a statistically significant positive relationship between executive pay and EM and between executive power and EM. Further, a statistically significant negative relationship between EM and the interaction effect of executive pay and executive power suggests that well-paid, powerful executives on the board of directors are less likely to pursue EM activity in India. Originality/Value: There are limited studies that utilise a large balanced panel data set of listed companies covering majority of the non-finance industries in the Indian economy over a span of 15 years. The study highlights the significant explanatory power for real EM in comparison to accruals-based EM in India. Implications: The positive link between executive pay and EM suggests that the designing of compensation packages is linked to long-term value creation rather than short-term earnings. The influence of executive power highlights the importance of board independence and balanced CEO power. The negative interaction effect suggests alignment of executive pay and power with long-term company goals to mitigate earnings manipulation.