Abstract
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.
Original language | English (US) |
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Pages (from-to) | 667-708 |
Number of pages | 42 |
Journal | Journal of Financial Economics |
Volume | 85 |
Issue number | 3 |
DOIs | |
State | Published - Sep 2007 |
Externally published | Yes |
Keywords
- Agency theory
- Executive compensation
- Restatements
- Stock options
ASJC Scopus subject areas
- Accounting
- Finance
- Economics and Econometrics
- Strategy and Management