The Use of Non Financial Performance Measures in Managers’ Compensation Contracts as Earnings Management Constraints

Earnings management literature argues that managers' compensation contracts are based on financial performance measures (FPM). Indeed, the accounting earnings have been the subject of several studies. Few of them have attempted to check whether to introduce non financial performance measures (NFPM) as a constraint of earnings management. The aim of this paper is to empirically test the impact of NFPM on earnings management behaviour. Our sample consists of 89 Canadian listed firms pertaining to three sectors over ten years 1997-2006. Results are conclusive and show that there is a negative relationship between discretionary accruals (DA) as a proxy for earning management and the relative importance of NFPM in managers' compensation contracts suggesting that NFPM act as an earnings management constraints