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

Organization Science, Vol. 18, No. 3, pp. 350-367

51 Pages Posted: 4 Sep 2007 Last revised: 5 Feb 2008

See all articles by Jared D. Harris

Jared D. Harris

University of Virginia - Darden School of Business

Philip Bromiley

University of California, Irvine

Date Written: October 2006

Abstract

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.

Keywords: corporate misconduct, behavioral theory, executive compensation, relative performance

JEL Classification: D83, G30, M52

Suggested Citation

Harris, Jared D. and Bromiley, Philip, Incentives to Cheat: The Influence of Executive Compensation and Firm Performance on Financial Misrepresentation (October 2006). Organization Science, Vol. 18, No. 3, pp. 350-367, Available at SSRN: https://ssrn.com/abstract=1010197

Jared D. Harris (Contact Author)

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

HOME PAGE: http://faculty.darden.virginia.edu/harrisj

Philip Bromiley

University of California, Irvine ( email )

Campus Drive
Irvine, CA 62697-3125
United States

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