The Impact of Performance-Based Compensation on Misreporting
39 Pages Posted: 11 Jun 2004
Date Written: June 2004
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: Suggested Citation