Managerial Incentives and Corporate Fraud: The Sources of Incentives Matter

Operating performance and stock return results imply that managers who commit fraud anticipate large stock price declines if they were to report truthfully, which would cause greater losses for managerial stockholdings than for options because of differences in convexity. Fraud firms have significan...

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Bibliographic Details
Published inReview of Finance Vol. 13; no. 1; pp. 115 - 145
Main Authors Johnson, Shane A., Ryan, Harley E., Tian, Yisong S.
Format Journal Article
LanguageEnglish
Published Oxford Oxford University Press 01.01.2009
Oxford University Press for European Finance Association
SeriesReview of Finance
Subjects
Executive compensation
Fraud
Incentives
Rates of return
Stock prices
Studies
K42
G34
M52
M41
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Summary:Operating performance and stock return results imply that managers who commit fraud anticipate large stock price declines if they were to report truthfully, which would cause greater losses for managerial stockholdings than for options because of differences in convexity. Fraud firms have significantly greater incentives from unrestricted stockholdings than control firms do, and unrestricted stockholdings are their largest incentive source. Our results emphasize the importance of the shape and vesting status of incentive payoffs in providing incentives to commit fraud. Fraud firms also have characteristics that suggest a lower likelihood of fraud detection, which implies lower expected costs of fraud.
ISSN:1572-3097
1573-692X
1875-824X
DOI:10.1093/rof/rfn014