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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
  • Michael McKee
  • Rudy Santore

Abstract

The use of equity-based compensation is an increasingly popular means by which to align the incentives of top management with that of the shareholders. However, recent theoretical and empirical research suggests 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 showing that the amount of fraud committed by subjects is positively correlated with the level of equity, as is the level of effort. As well, 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. Key Words:

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File URL: http://econ.appstate.edu/RePEc/pdf/wp0805.pdf
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Bibliographic Info

Paper provided by Department of Economics, Appalachian State University in its series Working Papers with number 08-05.

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Date of creation: 2008
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Handle: RePEc:apl:wpaper:08-05

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Postal: Thelma C. Raley Hall, Boone, North Carolina 28608
Phone: 828-262-2148
Fax: 828-262-6105
Web page: http://www.business.appstate.edu/departments/economics/
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  5. repec:att:wimass:9309 is not listed on IDEAS
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Cited by:
  1. Galarza, Francisco B., 2009. "Choices under Risk in Rural Peru," Staff Paper Series 542, University of Wisconsin, Agricultural and Applied Economics.
  2. Maier, Johannes & Rüger, Maximilian, 2010. "Measuring Risk Aversion Model-Independently," Discussion Papers in Economics 11873, University of Munich, Department of Economics.
  3. 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-00418899, HAL.
  4. Drichoutis, Andreas & Lusk, Jayson, 2012. "Risk preference elicitation without the confounding effect of probability weighting," MPRA Paper 37762, University Library of Munich, Germany.
  5. Rudy Santore & Martin Tackie, 2013. "Stock option contract design and managerial fraud," Economics Bulletin, AccessEcon, vol. 33(2), pages 1283-1289.

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