Hand in the Cookie Jar: An Experimental Investigation of Equity-based Compensation and Managerial Fraud
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:
|Date of creation:||2008|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.business.appstate.edu/departments/economics/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Steven D. Levitt & John A. List, 2007. "What Do Laboratory Experiments Measuring Social Preferences Reveal About the Real World?," Journal of Economic Perspectives, American Economic Association, vol. 21(2), pages 153-174, Spring.
- Charles A. Holt & Susan K. Laury, 2002. "Risk Aversion and Incentive Effects," American Economic Review, American Economic Association, vol. 92(5), pages 1644-1655, December.
- Ittner, Christopher D. & Lambert, Richard A. & Larcker, David F., 2003. "The structure and performance consequences of equity grants to employees of new economy firms," Journal of Accounting and Economics, Elsevier, vol. 34(1-3), pages 89-127, January.
- Rachel Croson & James Sundali, 2005. "The Gambler’s Fallacy and the Hot Hand: Empirical Data from Casinos," Journal of Risk and Uncertainty, Springer, vol. 30(3), pages 195-209, May.
- repec:att:wimass:9309 is not listed on IDEAS
- Smith, Vernon L & Walker, James M, 1993. "Monetary Rewards and Decision Cost in Experimental Economics," Economic Inquiry, Western Economic Association International, vol. 31(2), pages 245-61, April.
- Andreoni, James, 1995.
"Cooperation in Public-Goods Experiments: Kindness or Confusion?,"
American Economic Review,
American Economic Association, vol. 85(4), pages 891-904, September.
- Brian J. Hall & Kevin J. Murphy, 2000.
"Stock Options for Undiversified Executives,"
NBER Working Papers
8052, National Bureau of Economic Research, Inc.
- Andreas Lange & John A. List & Michael K. Price, 2004. "Auctions with Resale When Private Values Are Uncertain: Theory and Empirical Evidence," NBER Working Papers 10639, National Bureau of Economic Research, Inc.
- Goeree, Jacob K. & Holt, Charles A. & Palfrey, Thomas R., 2003. "Risk averse behavior in generalized matching pennies games," Games and Economic Behavior, Elsevier, vol. 45(1), pages 97-113, October.
- Denis, David J. & Hanouna, Paul & Sarin, Atulya, 2006. "Is there a dark side to incentive compensation?," Journal of Corporate Finance, Elsevier, vol. 12(3), pages 467-488, June.
- Smith, Vernon L, 1982. "Microeconomic Systems as an Experimental Science," American Economic Review, American Economic Association, vol. 72(5), pages 923-55, December.
- Glenn W. Harrison & Eric Johnson & Melayne M. McInnes & E. Elisabet Rutstr�m, 2005. "Risk Aversion and Incentive Effects: Comment," American Economic Review, American Economic Association, vol. 95(3), pages 897-901, June.
- Murphy, Kevin J., 2003. "Stock-based pay in new economy firms," Journal of Accounting and Economics, Elsevier, vol. 34(1-3), pages 129-147, January.
- H. David Robison & Rudy Santore, 2011. "Managerial Incentives, Fraud, and Monitoring," The Financial Review, Eastern Finance Association, vol. 46(2), pages 281-311, 05.
- Poirier, Dale J., 1980. "Partial observability in bivariate probit models," Journal of Econometrics, Elsevier, vol. 12(2), pages 209-217, February.
- Mark C. Anderson & Rajiv D. Banker & Sury Ravindran, 2000. "Executive Compensation in the Information Technology Industry," Management Science, INFORMS, vol. 46(4), pages 530-547, April.
When requesting a correction, please mention this item's handle: RePEc:apl:wpaper:08-05. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (O. Ashton Morgan)
If references are entirely missing, you can add them using this form.