Executive Pay, Earnings Manipulation and Shareholder Litigation

48 Pages Posted: 20 Jan 2004

See all articles by Ailsa Röell

Ailsa Röell

Columbia University, School of International and Public Affairs

Lin Peng

Baruch College/CUNY - Zicklin School of Business

Date Written: August 2006

Abstract

The paper examines the impact of executive compensation on private securities litigation. We find that incentive pay in the form of options increases the probability of securities class action litigation, holding constant a wide range of firm characteristics. We further document that there is abnormal upward earnings manipulation during litigation class periods and that insiders exercise more options and sell more shares during class periods, but that this activity is largely driven by pre-existing option holdings of the managers. Our results suggest that option-based compensation may have the unintended side effect of giving executives an incentive to focus excessively on the short term share price.

Keywords: securities litigation; executive compensation; executive stock options; earnings management; insider sales

JEL Classification: G30, G34, J33, K22, M41

Suggested Citation

Röell, Ailsa A. and Peng, Lin, Executive Pay, Earnings Manipulation and Shareholder Litigation (August 2006). AFA 2005 Philadelphia Meetings. Available at SSRN: https://ssrn.com/abstract=488148 or http://dx.doi.org/10.2139/ssrn.488148

Ailsa A. Röell

Columbia University, School of International and Public Affairs ( email )

3022 Broadway
New York, NY 10027
United States
(212) 854-9289 (Phone)

Lin Peng (Contact Author)

Baruch College/CUNY - Zicklin School of Business ( email )

55 Lexington Ave., Box B13-260
New York, NY 10010
United States
(646)312-3491 (Phone)
(646)312-3451 (Fax)

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