Earnings-based bonus plans and earnings management by business-unit managers

This study tests the bonus-maximization hypothesis that managers make discr etionary accrual decisions to maximize their short-term bonuses. By using t he management and financial reporting database of a large conglomerate, we extend previous investigations in two ways. First, the analysis is conducte d using business unit-level data, which reduces the aggregation problem tha t is likely to arise using firm-level data. Second, managers in this settin g are paid bonuses based solely on business unit earnings. The potentially confounding effects of long-term performance and stock-based incentive comp ensation are thus absent. These innovations yield robust evidence consisten t with Healy (1985). (C) 1999 Elsevier Science B.V. All rights reserved. JE L classification: M41; J33.