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

  • 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)

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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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
Contact details of provider: Web page: http://www.southerneconomic.org/

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