Incentive Compensation of Financial Managers and the Willingness to Engage in Unethical Behavior
Posted: 13 Sep 2013
Date Written: September 12, 2013
We collect detailed survey data on financial managers’ annual bonus plans and extensively validate a measure of the willingness to engage in unethical behavior using a panel of 253 respondents. Our main finding suggests that incentives to meet financial targets are positively associated with financial managers’ willingness to engage in unethical behavior. In contrast, we find no such association when incentives are based on non-financial targets or subjective evaluations. Finally, we find that willingness to engage in unethical behavior is lower when financial managers are close to retirement, when they score low on a measure of organizational identification, and when they are in high-growth entities or in publicly listed companies. We use two follow-up surveys to corroborate the robustness of our findings. The first follow-up replicates our main finding in a changes model that controls for unobserved individual heterogeneity. The second follow-up shows that our measure of the willingness to engage in unethical behavior compares favorably to proxies for earnings management commonly used in prior literature both in terms of psychometric properties and in terms of statistical power to detect a relation with incentives choices.
Keywords: Incentives, choice of performance measures, chief financial officers, earnings management
JEL Classification: M41, M52
Suggested Citation: Suggested Citation