Why do Corporate Managers Misstate Financial Statements? The Role of Option Compensation and Other Factors
Posted: 8 Apr 2007 Last revised: 19 Feb 2008
We investigate the incentives that led to the rash of restated financial statements at the end of the 1990s market bubble. We find that the likelihood of a misstated financial statement increases greatly when the CEO has very sizable holdings of in-the-money stock options. Misstatements are also more likely for firms that are constrained by an interest-coverage debt covenant, that raise new debt or equity capital, or that 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: M41, M43, M52, J33, G32, G34
Suggested Citation: Suggested Citation