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Unpacking the assumption that stock option compensation leads to earnings management

Scholars and practitioners alike have been influenced by popular research suggesting that stock option compensation rewards executives for risk-taking behavior that leads to earnings management. But what if their research wasn’t complete?

Hyun Jung Park and his co-authors prove that the work of influential researchers had not accounted for numerous meaningful factors, such as trends in company growth opportunities and time-periods. Park’s own research proves that their assumed cause-and-effect ideas of risk-taking to earnings management does not hold true in many cases.

Board members, regulators and shareholders are encouraged not to view stock option compensation as a cause for executives to manage earnings, as has been previously suggested.