Managerial Incentives and Corporate Fraud: The Sources of Incentives Matter

40 Pages Posted: 2 Jun 2006 Last revised: 18 Oct 2011

Shane A. Johnson

Texas A&M University - Department of Finance

Harley E. Ryan Jr.

Georgia State University - Department of Finance

Yisong S. Tian

York University - Schulich School of Business

Date Written: February 29, 2008

Abstract

Operating and stock return results imply that managers that commit fraud likely anticipate large stock price declines if they do not misreport earnings. Stock price declines cause greater losses for managerial stockholdings than for option holdings because of differences in payoff convexity. Fraud firms have significantly greater incentives from unrestricted stockholdings than control firms do, and unrestricted stockholdings are the largest source of incentives at fraud firms. Collectively, these results emphasize the importance of the shape and vesting status of managerial 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. Overall, the results are consistent with the economic theory of crime.

Keywords: corporate fraud, incentives, stock options, executive compensation, governance

JEL Classification: G34, K22, M41, J33

Suggested Citation

Johnson, Shane A. and Ryan, Harley E. and Tian, Yisong S., Managerial Incentives and Corporate Fraud: The Sources of Incentives Matter (February 29, 2008). EFA 2006 Zurich Meetings. Available at SSRN: https://ssrn.com/abstract=395960 or http://dx.doi.org/10.2139/ssrn.395960

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 Jr.

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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