Equity Incentives, Agency Conflict, and CEO Wealth-Pursuing Misreporting

48 Pages Posted: 13 Jan 2021 Last revised: 18 Jan 2022

See all articles by Wenjiao Cao

Wenjiao Cao

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Yuping Jia

Frankfurt School of Finance & Management - Accounting Department

Yachang Zeng

Nanyang Business School, Nanyang Technological University

Date Written: January 17, 2022

Abstract

Conventional agency theory suggests that equity-based pay-for-performance sensitivity (i.e., delta) effectively mitigates agency conflict between incumbent shareholders and CEOs. However, rational choice theory in criminology suggests the opposite for the shareholder-CEO conflict that manifests as misreporting motivated by a CEO’s intention to pursue equity wealth (henceforth, wealth-pursuing misreporting). Does delta curb or aggravate such shareholder-CEO conflict? This question is difficult to address because a CEO’s misreporting intention is difficult to measure. To tackle this empirical challenge, we identify wealth-pursuing misreporting from the unstructured textual data in SEC Accounting and Auditing Enforcement Releases (AAERs). Consistent with rational choice theory, we find that the propensity for wealth-pursuing misreporting is strongly and positively associated with delta. Our findings have broad implications for using delta as a corporate governance tool to mitigate the shareholder-CEO conflict regarding financial reporting.

Keywords: CEO portfolio delta; Wealth-pursuing misreporting; Shareholder-CEO conflict; Shareholder-CEO confluence; AAER

JEL Classification: G34, J33, M41, M43

Suggested Citation

Cao, Wenjiao and Jia, Yuping and Zeng, Yachang, Equity Incentives, Agency Conflict, and CEO Wealth-Pursuing Misreporting (January 17, 2022). Nanyang Business School Research Paper No. 21-02, Available at SSRN: https://ssrn.com/abstract=3685697 or http://dx.doi.org/10.2139/ssrn.3685697

Wenjiao Cao (Contact Author)

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

Yuping Jia

Frankfurt School of Finance & Management - Accounting Department ( email )

Sonnemannstraße 9-11
Frankfurt
Germany
0049 69 154008 839 (Phone)

Yachang Zeng

Nanyang Business School, Nanyang Technological University ( email )

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