Managerial Incentives and Corporate Fraud: The Sources of Incentives Matter

Posted: 17 Jan 2009

See all articles by Shane A. Johnson

Shane A. Johnson

Texas A&M University - Department of Finance

Harley E. Ryan

Georgia State University - Department of Finance

Yisong S. Tian

York University - Schulich School of Business

Date Written: January 2009

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.

Keywords: M52, G34, K42, M41

Suggested Citation

Johnson, Shane A. and Ryan, Harley E. and Tian, Yisong Sam, Managerial Incentives and Corporate Fraud: The Sources of Incentives Matter (January 2009). Review of Finance, Vol. 13, Issue 1, pp. 115-145, 2009. Available at SSRN: https://ssrn.com/abstract=1328779 or http://dx.doi.org/rfn014

Shane A. Johnson (Contact Author)

Texas A&M University - Department of Finance ( email )

Mays School of Business
College Station, TX 77843-4218
United States
979-862-3318 (Phone)

Harley E. Ryan

Georgia State University - Department of Finance ( email )

University Plaza
35 Broad Street, Suite 1221
Atlanta, GA 30303-3083
United States
404-651-2674 (Phone)
404-651-2630 (Fax)

Yisong Sam Tian

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada
416-736-2100, ext 77943 (Phone)
416-736-5687 (Fax)

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