The impact of performance-based compensation on misreporting |
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Authors: | Natasha Burns Simi Kedia |
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Affiliation: | 1. Terry College of Business, The University of Georgia, Athens, GA, 30602, USA;2. Rutgers Business School, Rutgers University, Newark, NJ, 07102, USA |
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Abstract: | This paper examines the effect of CEO compensation contracts on misreporting. We find that the sensitivity of the CEO's option portfolio to stock price is significantly positively related to the propensity to misreport. We do not find that the sensitivity of other components of CEO compensation, i.e., equity, restricted stock, long-term incentive payouts, and salary plus bonus have any significant impact on the propensity to misreport. Relative to other components of compensation, stock options are associated with stronger incentives to misreport because convexity in CEO wealth introduced by stock options limits the downside risk on detection of the misreporting. |
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Keywords: | G30 G34 |
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