The Impact of Performance-based Compensation on Misreporting

39 Pages Posted: 11 Jun 2004  

Natasha Burns

University of Texas at San Antonio - Department of Finance

Simi Kedia

Rutgers Business School

Date Written: June 2004

Abstract

This paper examines the effect of CEO compensation contracts on misreporting. We find that the sensitivity of the CEO's option portfolio to stock price is significantly positively related to the propensity to misreport. We do not find that the sensitivity of other components of CEO compensation, i.e., equity, restricted stock, long-term incentive payouts and salary and bonus have any significant impact on the propensity to misreport. Relative to other components of compensation, stock options are associated with stronger incentives to misreport because convexity in CEO wealth introduced by stock options limits the downside risk on detection of the misreporting.

Keywords: Restatments, misreporting, compensation, options

JEL Classification: G30, G32, G34

Suggested Citation

Burns, Natasha and Kedia, Simi, The Impact of Performance-based Compensation on Misreporting (June 2004). Available at SSRN: https://ssrn.com/abstract=555903 or http://dx.doi.org/10.2139/ssrn.555903

Natasha Burns (Contact Author)

University of Texas at San Antonio - Department of Finance ( email )

San Antonio, TX 78249
United States
210-458-6838 (Phone)

Simi Kedia

Rutgers Business School ( email )

117 Levin
94 Rockafellar Road
Piscataway, NJ
United States
8484454195 (Phone)

Paper statistics

Downloads
983
Rank
17,397
Abstract Views
3,968