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

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  • David Bruner

    ()
    (Department of Economics, Walker College of Business, Raley Hall, 416 Howard Street, Appalachian State University, Boone, NC 28608, USA)

  • Michael McKee

    ()
    (Department of Economics, Walker College of Business, Raley Hall, 416 Howard Street, Appalachian State University, Boone, NC 28608, USA)

  • Rudy Santore

    ()
    (Department of Economics, College of Business Administration, Stokely Management Center, 1000 Volunteer Boulevard, University of Tennessee, Knoxville, TN 37996, USA)

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.

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Bibliographic Info

Article provided by Southern Economic Association in its journal Southern Economic Journal.

Volume (Year): 75 (2008)
Issue (Month): 1 (July)
Pages: 261-278

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Handle: RePEc:sej:ancoec:v:75:1:y:2008:p:261-278

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Cited by:
  1. Rudy Santore & Martin Tackie, 2013. "Stock option contract design and managerial fraud," Economics Bulletin, AccessEcon, vol. 33(2), pages 1283-1289.
  2. André De Palma & Nathalie Picard & Anthony Ziegelmeyer, 2009. "Individual and couple decision behavior under risk: Evidence on the dynamics of power balance," Working Papers, HAL hal-00418899, HAL.
  3. Galarza, Francisco B., 2009. "Choices under Risk in Rural Peru," Staff Paper Series, University of Wisconsin, Agricultural and Applied Economics 542, University of Wisconsin, Agricultural and Applied Economics.
  4. Maier, Johannes & Rüger, Maximilian, 2010. "Measuring Risk Aversion Model-Independently," Discussion Papers in Economics, University of Munich, Department of Economics 11873, University of Munich, Department of Economics.
  5. Drichoutis, Andreas & Lusk, Jayson, 2012. "Risk preference elicitation without the confounding effect of probability weighting," MPRA Paper 37762, University Library of Munich, Germany.

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