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Managerial compensation, product market competition and fraud

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  • Andergassen, Rainer

Abstract

We study a model in which a manager can engage in unobservable cost-cutting effort, possesses private information about firm profits and where shareholders employ stock and stock option-based compensation packages to align the manager's interests with theirs. Stock-based incentives may induce the manager to misrepresent profits with the aim to increase the firm's stock price and hence her compensation. Common wisdom holds that competition disciplines the manager. We investigate how product market competition affects the shareholders' trade-off between fraud and effort and hence incentive provision.

Suggested Citation

  • Andergassen, Rainer, 2016. "Managerial compensation, product market competition and fraud," International Review of Economics & Finance, Elsevier, vol. 45(C), pages 1-15.
    • Handle: RePEc:eee:reveco:v:45:y:2016:i:c:p:1-15
    DOI: 10.1016/j.iref.2016.04.010
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    More about this item

    Keywords

    Executive compensation; Fraud; Incentives; Product market competition; Stock and stock options;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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