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Bonus Plan Hypothesis

Managers with bonus plans or firms close to violating debt covenants are more likely to shift reported earnings from future periods to the current period to increase bonuses and avoid covenant violations. However, managers of firms facing high political costs are more likely to defer earnings to future periods to reduce current profitability and "political heat".

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najihah radzi
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1K views1 page

Bonus Plan Hypothesis

Managers with bonus plans or firms close to violating debt covenants are more likely to shift reported earnings from future periods to the current period to increase bonuses and avoid covenant violations. However, managers of firms facing high political costs are more likely to defer earnings to future periods to reduce current profitability and "political heat".

Uploaded by

najihah radzi
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

1.

Bonus plan hypothesis


Managers of firms with bonus plans are more likely to choose accounting
procedures that shift reported earnings from future periods to the current period. By
doing so, they can increase their bonuses for the current year.
2. Debt covenant hypothesis
The closer a firm is to violating accounting-based debt covenants, the more likely
the firm manager is to select accounting procedures that shift reported earnings
from future periods to the current period.
By increasing current earnings, the company is less likely to violate debt
covenants, and management has minimized its constraints in running the company
3. Political cost hypothesis
The greater the political costs faced by the firm, the more likely the manager is to
choose accounting procedures that defer reported earnings from current to future
periods.
High profitability can lead to increased political heat, and can lead to new taxes
or regulations esp. for large firms which may be held to higher reporting standards

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