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The Impact of Performance-based Compensation on Misreporting

Natasha Burns
University of Texas, San Antonio

Simi Kedia
Rutgers University, Newark, School of Business-Newark, Department of Finance & Economics

June 2004

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 and 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.

Keywords: Restatments, misreporting, compensation, options

JEL Classifications: G30, G32, G34

Working Paper Series

Date posted: June 11, 2004 ; Last revised: July 19, 2004

Suggested Citation

Burns, Natasha and Kedia, Simi, The Impact of Performance-based Compensation on Misreporting (June 2004). Available at SSRN: http://ssrn.com/abstract=555903

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Contact Information

Natasha Burns (Contact Author) University of Texas, San Antonio ( email ) Department of Finance San Antonio, TX 78249 United States 210-458-6838 (Phone)
Simi Kedia Rutgers University, Newark, School of Business-Newark, Department of Finance & Economics ( email ) 111 Washington Avenue Newark, NJ 07102 United States 973-353-1145 (Phone)