Executive Compensation, Earnings Management and Shareholder Litigation

This paper examines the effects of executive compensation and potential for earnings management on the incidence of shareholder class action lawsuits and their outcomes. Although damage measurement factors,managerial option intensity, and earnings management all significantly affect the probability of lawsuits, they differ in their influence on the likelihood of positive settlement and on settlement amount: Damage factors do not affect the likelihood of settlement versus dismissal.High option intensity raises the probability of positive settlement, but does not affect its amount.High earnings management, on the other hand, does not affect the likelihood of settlement, but does increase settlement amount.These findings suggest that factors typically used to explain shareholder lawsuits should be interpreted with care