Managerial Incentives and Corporate Fraud: The Sources of IncentivesMatter

Managerial Incentives and Corporate Fraud: The Sources of IncentivesMatter 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Finance Oxford University Press

Managerial Incentives and Corporate Fraud: The Sources of IncentivesMatter

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Publisher
Oxford University Press
Copyright
The Author 2008. Published by Oxford University Press on behalf of the European Finance Association. All right reserved. For Permissions, please email: journals.permissions@oxfordjournals.org
Subject
Articles
ISSN
1572-3097
eISSN
1573-692X
D.O.I.
10.1093/rof/rfn014
Publisher site
See Article on Publisher Site

Abstract

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.

Journal

Review of FinanceOxford University Press

Published: Jan 9, 2009

Keywords: JEL Classification M52 G34 K42 M41

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