Ceos on the edge: earnings manipulation and stock-based incentive misalignment

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

doi:10.5465/AMJ.2008.31767230

Ceos on the edge: earnings manipulation and stock-based incentive misalignment

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

Research output: Contribution to journal › Article › Research › peer-review

166 Citations (Scopus)

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. Copyright of the Academy of Management, all rights reserved.

Original language	English
Pages (from-to)	241-258
Number of pages	18
Journal	Academy of Management Journal
Volume	51
Issue number	2
DOIs	https://doi.org/10.5465/AMJ.2008.31767230
Publication status	Published - Apr 2008
Externally published	Yes

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Ceos on the edge: earnings manipulation and stock-based incentive misalignment

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