Article2008

Ceos On the Edge: Earnings Manipulation and Stock-Based Incentive Misalignment

Xiaomeng Zhang · Kathryn M. Bartol · Ken G. Smith · Michael D. Pfarrer · Dmitry Mikhail Khanin

256 citations0/0 files storedAcademy of Management Journal

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Auditing, Earnings Management, Governance Corporate Finance and Governance Corporate Governance and Financial Management

Abstract

Synthesizing agency theory and prospect theory, we examined the effects of stock-based incentives on CEO earnings manipulation behaviors. In analyses of data compiled from the public companies listed in Compustat's Executive Compensation Database and a U.S. General Accounting Office restatements database, we found that CEOs were more likely to manipulate firm earnings when they had more out-of-the-money options and lower stock ownership. Firm performance and CEO tenure interacted with out-of-the-money options and ownership to influence CEO earnings manipulation behaviors. Our findings inform agency-based views by providing evidence that, under certain conditions, stock-based managerial incentives lead to incentive misalignment.

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References

1976Theory of the firm: Managerial behavior, agency costs and ownership structure 1973The Pricing of Options and Corporate Liabilities 1983Separation of Ownership and Control 1992Advances in prospect theory: Cumulative representation of uncertainty 2019American Economic Review 1984Upper Echelons: The Organization as a Reflection of Its Top Managers 1980Toward a positive theory of consumer choice 1990Performance Pay and Top-Management Incentives

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