TY - JOUR
T1 - Why do corporate managers misstate financial statements? The role of option compensation and other factors
AU - Efendi, Jap
AU - Srivastava, Anup
AU - Swanson, Edward P.
N1 - Funding Information:
We would like to thank an anonymous reviewer, Hemang Desai, Peter Easton, Gary Giroux, Michael Jensen, Mary Lea McAnally, James Myers, Tom Omer, Lynn Rees, Dean Wichern, Mike Wilkins and participants at both the 2006 Lone Star Research Conference at Texas A&M and the 2006 AAA Annual Meeting for suggestions that have considerably improved the paper. Swanson received summer funding from the Mays Business School and the Durst Chair in Accounting. Srivastava received funding from a fellowship sponsored by Deloitte & Touche Fellowship.
PY - 2007/9
Y1 - 2007/9
N2 - 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, M.C., 2005a, Agency costs of overvalued equity. Financial Management 34, 5-19] as substantially overvalued equity caused managers to take actions to support the stock price.
AB - 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, M.C., 2005a, Agency costs of overvalued equity. Financial Management 34, 5-19] as substantially overvalued equity caused managers to take actions to support the stock price.
KW - Agency theory
KW - Executive compensation
KW - Restatements
KW - Stock options
UR - http://www.scopus.com/inward/record.url?scp=34547662432&partnerID=8YFLogxK
UR - http://www.scopus.com/inward/citedby.url?scp=34547662432&partnerID=8YFLogxK
U2 - 10.1016/j.jfineco.2006.05.009
DO - 10.1016/j.jfineco.2006.05.009
M3 - Article
AN - SCOPUS:34547662432
SN - 0304-405X
VL - 85
SP - 667
EP - 708
JO - Journal of Financial Economics
JF - Journal of Financial Economics
IS - 3
ER -