An equilibrium model of incentive contracts in the presence of information manipulation

Goldman, Eitan; Slezak, Steve L.

doi:10.1016/j.jfineco.2005.05.007

Cited by 385 publications

(220 citation statements)

References 36 publications

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“…Compensation schemes are designed to induce effort but they may also induce costly fraudulent activity (see Goldman and Slezak, 2005). Self-interested manager may engage in earnings misrepresentation and manipulation, or fraudulent information dissemination to inflate the short term stock price and thus also his compensation and wealth.…”

Section: Introductionmentioning

confidence: 99%

“…9 A growing literature studies the relationship between executive compensation and fraudulent behavior. Goldman and Slezak (2005), restricting their analysis to stock based compensation, study the link between executive compensation and fraudulent misreporting. They find that the optimal pay-for-performance sensitivity which balances the provision of effort and fraud.…”

Section: Introductionmentioning

confidence: 99%

See 1 more Smart Citation

High-powered incentives and fraudulent behavior: Stock-based versus stock option-based compensation

Andergassen

2008

Economics Letters

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Abstract.In this paper shareholders face the trade-off between providing managers with incentives to exert beneficial effort and to engage in costly fraudulent activity. We solve for the optimal compensation package, given that shareholders can either grant (restricted) stock or stock options and given fixed average compensation costs. We show that if the negative effect of fraud on the company's value is sufficiently large then stock based compensation is optimal. Otherwise, stock option based compensation is optimal. Furthermore, we show that the fraud to effort ratio is increasing in the strike price and that the optimal strike price is decreasing in the size of the negative effects of fraud on the company's value.

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Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

High-powered incentives and fraudulent behavior: Stock-based versus stock option-based compensation

Andergassen

2008

Economics Letters

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“…Bar-Gill and Bebchuk (2003) report that lax accounting and legal environments can increase the incidence of misreporting and consequently distortions in capital allocations. Goldman and Slezak's (2006) model implies that, if the penalty for manipulation is increased, it may actually induce corporate fraud, because corporate monitoring may become less vigilant in light of more complex regulating policies.…”

Section: Discussionmentioning

confidence: 99%

“…For example, if they are not yet able to sell shares, they may misreport to decrease the cost of capital. Goldman and Slezak (2006) argue that the optimal pay-for-performance sensitivity, maximizing firm value, is a trade-off between the benefits arising from managerial effort and the cost of inflating firm performance. Their model implies that pay-for-performance sensitivity increases the possibility of manipulation.…”

Section: Previous Literature and Hypotheses Developmentmentioning

confidence: 99%

Equity Incentives and Corporate Fraud in China

2015

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This paper explores how managers' and supervisors' equity incentives impact the likelihood of committing corporate fraud in Chinese-listed firms. Previous research has shown that corporate fraud in China is a widespread phenomenon and has severe consequences for affected firms and executives. However, our understanding of the reasons fraud is committed in a Chinese setting have been very limited thus far. This is an increasingly important topic, because corporate governance is rapidly changing in China, and it is unclear whether adopting the executive compensation practices of the West is appropriate for Chinese firms. We show that managers' equity incentives increase their propensity to commit corporate fraud. We also find that this effect is more pronounced for state-owned firms. However, we find a negative but not significant relationship between the equity incentives of the supervisory board and the incidence of fraud.

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“…(There are exceptions: under-reporting earnings in Aboody and Kasznik 2000 lowers the exercise price for the manager's options and in Liberty and Zimmerman 1986 improves management's position in labor negotiations.) The manager may derive one of a number of benefi ts from infl ating the fi rm's position: retaining his job and the associated private benefi ts for a longer period (for example, Fudenberg and Tirole 1995), obtaining a higher stock price for inside trades (for example, Bar-Gill and Bebchuk 2002) or as an agent for current rather than future shareholders (for example, Dye 1988), or jamming a principal's observation of his eff ort in order to increase incentive pay (for example, Goldman and Slezak 2006).…”

Section: Conceptual Issuesmentioning

confidence: 99%