Because management positions require a substantial amount of expert knowledge and the cost of monitoring managerial behavior is too high, a firm cannot provide managers with a proper incentive based on managerial effort. Therefore, most firms use performance measures to design compensation contracts. When the incentive in a compensation contract is high, managers have increased motivation to manipulate earnings. This study investigated whether the proportion of stock-based compensation to the total compensation scheme influences managers' choice between discretionary accrual and real earnings management. The results indicated that a firm that has a high proportion of stock-based compensation also has a large absolute value of discretionary accrual, which increases a firm's litigation risk and has a large amount of real earnings management, thereby reducing the value of a firm in the long term.