ANNUAL BONUS SCHEMES AND THE MANIPULATION OF EARNINGS

Using confidential data of executive-specific short-term bonus plans, we investigate the extent to which executives manipulate earnings to m aximize the present value of bonus plan payments. As such, this paper extends the work of Healy (1985). Like Healy, we find evidence consist ent with the hypothesis that managers manipulate earnings downwards wh en their bonuses are at their maximum. Unlike Healy, we find no eviden ce that managers manipulate earnings downwards when earnings are below the minimum necessary to receive any bonus. We demonstrate that Healy 's results at the lower bound are likely to be induced by his methodol ogy.