The Impact of Performance-based Compensation on Misreporting

Price support by bank-affiliated mutual funds

“…Bank managers might resort to price support because of career concerns or peer competition, and because compensation is typically linked to share prices. The existing literature shows that stock-based executive compensation incentivizes managers to manipulate stock prices through misreporting, earnings management, and fraudulent accounting [see Peng and Roell (2008) and Benmelech, Kandel, and Veronesi (2010) for recent theoretical contributions and Bergstresser and Philippon (2006) and Burns and Kedia (2006), among others, for supporting empirical evidence]. We anticipate that the same incentive structure would also lead managers to manipulate prices by influencing affiliated funds.…”

“…First, our findings relate to other studies showing that executive compensation and career concerns incentivize managers to manipulate stock prices. Bergstresser and Philippon (2006) and Burns and Kedia (2006) show that managers attempt to manipulate prices though misreporting, earnings management, and fraudulent accounting. Ahern and Sosyura (2014) document that firms manage media coverage to influence their stock price during mergers and acquisitions.…”

CEO compensation, customer satisfaction, and firm value

“…Gao and Shrieves (2002) find a positive relationship between the intensity of earnings management and option sensitivity. Burns and Kedia (2006) tie incentive compensation sensitivity to the probability of corporate misreporting, although Erickson et al (2006) find no significant relationship between the sensitivity of incentive compensation to stock price changes of the top management team and fraud. Efendi et al (2007) show that there is a significant, positive association between CEO holdings of in-the-money stock option holdings and accounting restatements.…”

“…If the stock is volatile, even with a small number of options, the CEO may recognize a large increase in wealth when the stock price goes up; correspondingly, if the stock is not volatile, a large number of options will not result in a large change in the CEO's wealth. Conversely, the delta takes into account both the number of options and the responsiveness of the options in the CEO's compensation portfolio to stock price changes (Burns and Kedia, 2006;Core and Guay, 2002). Furthermore, the delta is a direct measure of how much (in dollar terms) the wealth of the CEO changes given a one-unit increase in stock price.…”

An overview of accounting restatement activity in the United States

“…Beneish (1999) finds, consistent with the logic that managers have financial incentives to mislead investors, managers of restatement firms are more likely to sell their shares during periods in which earnings were IJCOMA 18,4 overstated. Similarly, Burns and Kedia (2005) show a positive association between financial performance incentives (stock options) and restatements for accounting irregularities.…”