Previous studies have conflicting results regarding the implications of earnings management using conventional measurements. Examining 8,723 firm-years from 2004-2010, this study develops a comprehensive measurement of earnings management from book-tax differences that incorporates both accruals management and taxable income related earnings manipulations. Using the new measure, we find executives exercise more stock options when earnings management is greater and time their stock option exercises regardless of the source of earnings management. The new measurement is shown to be more comprehensive than conventional earnings management measures focusing on accruals management alone and well suited to examine the relationship between earnings management and stock option exercises.
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