Meeting or Missing Earnings Benchmarks : The Role of CEO Integrity

This paper examines the role of CEO integrity in determining whether a company's earnings benchmarks will be met, beaten or missed. Prior literature has provided evidence that managers have incentives for meeting or beating earnings benchmarks and are rewarded by the market for doing so (Lopez and Rees 2002; Skinner and Sloan 2002). Managers also have incentives to miss their earnings targets for the benefit of a lower strike price on subsequent option grants (McAnally et al. 2008). A CEO's involvement in backdating is taken here as a measure of his/her integrity. This paper shows that CEO integrity significantly influences benchmark meeting/beating behavior. In other words, backdating CEOs are more likely to meet or narrowly beat all three earnings benchmarks examined in the paper: positive earnings, last year's earnings and analysts' forecasts. At the same time, they are also less likely to just miss a zero earnings benchmark. The results presented in this paper further validate the use of benchmark meeting/beating as a measure of earnings manipulation