Incentives to Cheat: The Influence of Executive Compensation and Firm Performance on Financial Misrepresentation

Despite the many undesirable outcomes of corporate misconduct, scholars have an inadequate understanding of corporate misconduct's causes and mechanisms. We extend the behavioral theory of the firm, which traditionally assumes away the possibility of firm impropriety, to develop hypotheses pred...

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Bibliographic Details
Published inOrganization science (Providence, R.I.) Vol. 18; no. 3; p. 350
Main Authors Harris, Jared, Bromiley, Philip
Format Journal Article
LanguageEnglish
Published Linthicum Institute for Operations Research and the Management Sciences 01.05.2007
Subjects
Correlation analysis
Executive compensation
Financial restatements
Financial statements
Misrepresentation
Organizational behavior
Studies
United States > US
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Summary:Despite the many undesirable outcomes of corporate misconduct, scholars have an inadequate understanding of corporate misconduct's causes and mechanisms. We extend the behavioral theory of the firm, which traditionally assumes away the possibility of firm impropriety, to develop hypotheses predicting that top management incentive compensation and poor organizational performance relative to aspirations increase the likelihood of financial misrepresentation. Using a sample of financial restatements prompted by accounting irregularities and identified by the U.S. Government Accountability Office, we find empirical support for both incentive and relative performance influences on financial statement misrepresentation. [PUBLICATION ABSTRACT]
Bibliography:SourceType-Scholarly Journals-1
ObjectType-Feature-1
content type line 14
ISSN:1047-7039
1526-5455
DOI:10.1287/orsc.1060.0241