Why do Corporate Managers Misstate Financial Statements? The Role of Option Compensation and Other Factors

Efendi, Jap; Srivastava, Anup; Swanson, Edward P.

doi:10.2139/ssrn.547922

Cited by 192 publications

(180 citation statements)

References 44 publications

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“…Efendi, Srivastava and Swanson (2004) find that the likelihood of an earnings restatement is significantly higher for firms that make one or more sizable acquisitions. Several studies have examined the relation between the structure of managerial compensation contracts and the likelihood of earnings management, and find that the pay-performance sensitivity induced by stock options seems to increase earnings management (see, e.g., Gao and Shrieves (2003)).…”

Section: Related Literaturementioning

confidence: 81%

Securities Fraud: An Economic Analysis

Wang

2005

SSRN Journal

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This thesis develops an economic analysis of securities fraud. The thesis consists of a theory essay and an empirical essay. In the theory essay, I analyze a firm's propensity to commit securities fraud and the real consequences of fraud. I show that fraud can lead to investment distortions.I characterize the nature of the distortions, and show that it results from fraud-induced market mispricing and management's ability to influence the firm's litigation risk through investment. The theory also characterizes the equilibrium supply of fraud. I demonstrate the linkages between a firm's fraud propensity and the structure of its assets in place and growth options, and analyze the effect of corporate governance on fraud. The theory provides testable implications on crosssectional determinants of firms' fraud propensities and the relation between fraud and investment.In the empirical essay, I test my main model predictions, using a new hand-compiled fraud data set. I use econometric methods to account for the unobservability of undetected frauds, and disentangle the effects of cross-sectional variables into their effect on the probability of committing fraud and the effect on the probability of detecting fraud. I find that the level, type, and financing of investment all matter in determining the probability of fraud and the likelihood of detection. I also examine the monitoring roles of large shareholders, institutional owners, independent auditors, and corporate boards. I find that large block or institutional holdings tend to discourage fraud by increasing the detection likelihood. The roles of independent auditors and corporate board are weaker. Finally, insider equity incentives, growth potential, external financing needs and profitability all influence a firm's propensity to commit fraud. The paper also demonstrates the importance of separating fraud commitment and fraud detection, because cross-sectional variables can have opposing effects on these two components, and therefore can be masked in their overall effect on the incidence of detected fraud.

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Section: Related Literaturementioning

confidence: 81%

Securities Fraud: An Economic Analysis

Wang

2005

SSRN Journal

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“…We first examine the effect of equity incentives on corporate fraud based on matched-sample and regression analyses. We follow previous studies such as Erickson et al (2006), Efendi et al (2007), Jia et al (2009), Hou and Moore (2010), and Armstrong et al (2013 to create a matched-sample based on an outcome-based matching procedure. In particular, we form matched pairs of fraud to non-fraud firms based on industry and firm size.…”

Section: Methodsmentioning

confidence: 99%

“…Independent represents the number of independent directors as a fraction of all directors (Beasley, 1996;Cornett et al, 2008). Dual Role is an indicator variable equal to 1 if an individual holds the CEO and chairperson positions simultaneously, and 0 otherwise (Efendi et al, 2007;Johnson et al, 2009). Ownership is the Herfindahl Index of ownership concentration that is calculated as the sum of the squared percentage of shares owned by the top ten shareholders (Jia et al, 2009).…”

Section: Control Variablesmentioning

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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“…The likelihood of accounting misstatements and severe accounting irregularities has been found to increase with the worth of CEO stock options [13]. This suggests that aggressive accounting may be employed to manipulate share prices when the benefit of doing so is stronger.…”

Section: World Of Labormentioning

confidence: 99%

Efficient markets, managerial power, and CEO compensation

Bognanno¹

2014

izawol

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte.

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Why do Corporate Managers Misstate Financial Statements? The Role of Option Compensation and Other Factors

Cited by 192 publications

References 44 publications

Securities Fraud: An Economic Analysis

Securities Fraud: An Economic Analysis

Equity Incentives and Corporate Fraud in China

Efficient markets, managerial power, and CEO compensation

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