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Why Do Corporate Managers Misstate Financial Statements? the Role of Option Compensation and Other Factors

62 Pages Posted: 6 May 2005  

Jap Efendi

University of Texas at Arlington

Anup Srivastava

Tuck School of Business at Dartmouth

Edward P. Swanson

Texas A&M University - Mays Business School; Mays Business School, Texas A&M University

Multiple version iconThere are 2 versions of this paper

Date Written: April 2, 2007

Abstract

We investigate incentives that led to the rash of restated financial statements at the end of the 1990s market bubble. We find the likelihood of a misstated financial statement increases greatly when the CEO has very sizable holdings of stock options "in-the-money" (i.e., stock price above exercise price). Misstatements are also more likely for firms that are constrained by an interest-coverage debt covenant, raise new debt or equity capital, or have a CEO who serves as board chair. Our results indicate that agency costs increased (Jensen 2005a) as substantially overvalued equity caused managers to take actions to support the stock price.

Keywords: restatements, stock options, executive compensation, agency theory, overvalued equity

JEL Classification: M14, M41, M43, M52, K22, J33, G34

Suggested Citation

Efendi, Jap and Srivastava, Anup and Swanson, Edward P., Why Do Corporate Managers Misstate Financial Statements? the Role of Option Compensation and Other Factors (April 2, 2007). Available at SSRN: https://ssrn.com/abstract=547922 or http://dx.doi.org/10.2139/ssrn.547922

Jap Efendi

University of Texas at Arlington ( email )

415 S West St Apt no 205
Arlington, TX 76019
United States

Anup Srivastava

Tuck School of Business at Dartmouth ( email )

Hanover, NH 03755
United States

Edward P. Swanson (Contact Author)

Texas A&M University - Mays Business School ( email )

430 Wehner
College Station, TX 77843-4353
United States
979-845-8970 (Phone)
979-845-0028 (Fax)

Mays Business School, Texas A&M University ( email )

Wehner, MS 4353
College Station, TX 77843-4353
United States
979-845-5014 (Phone)
979-845-0028 (Fax)

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