Identity and incentives: impact on accounting manipulation

This study examines how individual characteristics of managers influence the incidence of accounting manipulation. We examine one particular characteristic argued to reduce agency costs, namely the extent to which an individual identifies with the firm (OI). Drawing on a database collected from financial controllers we find support for our expectations that incentive compensation contracts increase accounting manipulation. However, this relation is moderated by OI. Our results support Akerlof and Kranton’s (2005) theoretical model that OI reduces agency costs. That is, managers with incentive-based compensation engage in lower levels of accounting manipulation when they identify with the firm.