Why Do Corporate Managers Misstate Financial Statements? the Role of Option Compensation and Other Factors
62 Pages Posted: 6 May 2005
Date Written: April 2, 2007
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: Suggested Citation