Hand in the Cookie Jar: An Experimental Investigation of Equity‐Based Compensation and Managerial Fraud

Abstract

The use of equity‐based compensation is an increasingly popular means by which to align the incentives of top management with those of the shareholders. However, recent theoretical and empirical research indicates that the use of equity‐based compensation has the unintended consequence of creating the incentive to commit managerial fraud of the type being reported in the press. This paper reports experimental evidence that shows that the amount of fraud committed by subjects is positively correlated with the level of equity, as is the level of effort. In addition, the amount of fraud that is committed is negatively correlated with the probability of detection and subjects' risk aversion. The experimental design permits the identification of causal relations in the directions just noted.

Does Independent Director’s Cash Compensation Matter? Evidence From Corporate Fraud

“…The empirical model includes a set of control variables to capture the independent influence of independent directors' cash pay on corporate fraud. Control variables are selected based on extant literature in this research stream (Bruner et al, 2008;Conyon & He, 2016;Kong et al, 2019;Liao et al, 2019;Persons, 2012;Qiu et al, 2019;Schuchter & Levi, 2016). Therefore, the empirical model includes independent director's characteristics such as IN-DEP_EXPERTISE, INDEP_EDUCATION, FEM_INDEP, and INDEP_AGE.…”

“…The compensation structure of independent directors plays an essential role in agency issues. The majority of the literature has focused on the equitybased incentives and has documented that equity-based compensation encourages managers to opportunistically behave in their favor rather than the interests of shareholders (Bruner et al, 2008;Denis et al, 2006;Erickson et al, 2006;Johnson et al, 2003Johnson et al, , 2009Karpoff et al, 2014;Murphy, 1999). On the other hand, limited evidence on the role of cash-based incentives in financial reporting quality has provided mixed results (Giannarakis et al, 2011;Persons, 2012;.…”