Accounting Professors Research
Cited in New York Times

November 8, 2004

A recent article in The New York Times on how executive compensation affects earnings cited the research of an accounting professor at the School of Business.

The Times article, Pennies That Aren't From Heaven, published November 7, explored how companies manage their earnings, often meeting analysts expectations by a single penny.

The article cited a study completed last year by Terry Warfield, associate professor of accounting at the University of Wisconsin-Madison School of Business, and Qiang Cheng, assistant professor of accounting at the University of British Columbia's Sauder School of Business, who earned a Ph.D. from UW-Madison in 2002. Their study found that managers with high equity incentives are more likely to report earnings that meet or just beat analysts' forecasts than are managers who have low equity incentives.

According to Warfield, Our research findings indicate that the greater the percentage of pay an executive receives in stock or stock-related elements, such as stock options, the bigger the incentive to manage earnings. Such earnings management is associated with subsequent selling of shares by management at higher prices.