Is There a Dark Side to Incentive Compensation?

43 Pages Posted: 17 Apr 2005

See all articles by David J. Denis

David J. Denis

University of Pittsburgh

Paul Hanouna

Villanova University - School of Business

Atulya Sarin

Santa Clara University - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: March 2005

Abstract

We report a significant positive association between the likelihood of securities fraud allegations and a measure of executive stock option incentives. This relation is robust to the inclusion of other components of the compensation structure and to other possible determinants of fraud allegations. In addition, we find that the positive relation between the likelihood of fraud allegations and option intensity is stronger in firms with higher outside blockholder and higher institutional ownership. These findings support the view that stock options increase the incentive to engage in fraudulent activity, and that this incentive is exacerbated by institutional and block ownership.

Keywords: Fraud, Incentive, Compensation, Board Structure, Option

JEL Classification: G30

Suggested Citation

Denis, David J. and Hanouna, Paul E. and Sarin, Atulya, Is There a Dark Side to Incentive Compensation? (March 2005). Available at SSRN: https://ssrn.com/abstract=695583 or http://dx.doi.org/10.2139/ssrn.695583

David J. Denis

University of Pittsburgh ( email )

Katz Graduate School of Business
Pittsburgh, PA 15260
United States
412-648-1708 (Phone)

Paul E. Hanouna

Villanova University - School of Business ( email )

800 Lancaster Avenue
Villanova, PA 19085-1678
United States

Atulya Sarin (Contact Author)

Santa Clara University - Department of Finance ( email )

Leavey School of Business and Administration
Santa Clara, CA 95053
United States
408-554-4953 (Phone)
408-904-4498 (Fax)

HOME PAGE: http://business.scu.edu/asarin

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