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 journalArticlepeer-review

130 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 languageEnglish
Pages (from-to)241-258
Number of pages18
JournalAcademy of Management Journal
Volume51
Issue number2
DOIs
Publication statusPublished - Apr 2008

ASJC Scopus subject areas

  • Business and International Management
  • Business, Management and Accounting(all)
  • Strategy and Management
  • Management of Technology and Innovation

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