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

Author

Listed:
  • 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.

Suggested Citation

  • David Bruner & Michael McKee & Rudy Santore, 2008. "Hand in the Cookie Jar: An Experimental Investigation of Equity-Based Compensation and Managerial Fraud," Southern Economic Journal, Southern Economic Association, vol. 75(1), pages 261-278, July.
  • Handle: RePEc:sej:ancoec:v:75:1:y:2008:p:261-278
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    References listed on IDEAS

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    Citations

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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. Galarza, Francisco, 2009. "Choices under Risk in Rural Peru," MPRA Paper 17708, University Library of Munich, Germany.
    3. André Palma & Nathalie Picard & Anthony Ziegelmeyer, 2011. "Individual and couple decision behavior under risk: evidence on the dynamics of power balance," Theory and Decision, Springer, vol. 70(1), pages 45-64, January.
    4. Rojas-Nazar, U.A. & Cullen, R. & Gardner, J.P.A. & Bell, J.J., 2015. "Marine reserve establishment and on-going management costs: A case study from New Zealand," Marine Policy, Elsevier, vol. 60(C), pages 216-224.
    5. Andreas C. Drichoutis & Jayson L. Lusk, 2016. "What can multiple price lists really tell us about risk preferences?," Journal of Risk and Uncertainty, Springer, vol. 53(2), pages 89-106, December.
    6. Drichoutis, Andreas & Lusk, Jayson, 2012. "Risk preference elicitation without the confounding effect of probability weighting," MPRA Paper 37762, University Library of Munich, Germany.
    7. Chan, Chia-Ying & Chou, De-Wai & Lin, Jane-Raung & Liu, Feng-Ying, 2016. "The role of corporate governance in forecasting bankruptcy: Pre- and post-SOX enactment," The North American Journal of Economics and Finance, Elsevier, vol. 35(C), pages 166-188.
    8. repec:bla:ecinqu:v:55:y:2017:i:1:p:434-450 is not listed on IDEAS
    9. Rainer Andergassen, 2015. "Product market competition and fraud in a model of price competition with horizontally differentiated products," Economics Bulletin, AccessEcon, vol. 35(3), pages 1669-1674.
    10. Maier, Johannes & Rüger, Maximilian, 2010. "Measuring Risk Aversion Model-Independently," Discussion Papers in Economics 11873, University of Munich, Department of Economics.
    11. Rudy Santore & Youping Li & Stephen Cotten, 2015. "Colluding with a conscience," Journal of Economics, Springer, vol. 114(3), pages 255-269, April.

    More about this item

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior

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