IDEAS home Printed from https://ideas.repec.org/a/ebl/ecbull/eb-13-00143.html
   My bibliography  Save this article

Stock option contract design and managerial fraud

Author

Listed:
  • Rudy Santore

    (University of Tennessee)

  • Martin Tackie

    (Concordia College)

Abstract

Stock option contracts provide managers with dual incentives, motivating both effort and fraud. We show that although there exists an infinity of stock option contracts that induce a given level of effort, no contract behaviorally dominates another in the sense that it induces relatively greater effort and relatively less fraud. We also characterize the schedule of implementable effort-fraud pairs.

Suggested Citation

  • Rudy Santore & Martin Tackie, 2013. "Stock option contract design and managerial fraud," Economics Bulletin, AccessEcon, vol. 33(2), pages 1283-1289.
    • Handle: RePEc:ebl:ecbull:eb-13-00143
    as

    Download full text from publisher

    File URL: http://www.accessecon.com/Pubs/EB/2013/Volume33/EB-13-V33-I2-P120.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Brian J. Hall & Kevin J. Murphy, 2003. "The Trouble with Stock Options," Journal of Economic Perspectives, American Economic Association, vol. 17(3), pages 49-70, Summer.
    2. 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, John Wiley & Sons, vol. 75(1), pages 261-278, July.
    3. Andergassen, Rainer, 2008. "High-powered incentives and fraudulent behavior: Stock-based versus stock option-based compensation," Economics Letters, Elsevier, vol. 101(2), pages 122-125, November.
    4. Brian J. Hall & Kevin J. Murphy, 2003. "The Trouble with Stock Options," NBER Working Papers 9784, National Bureau of Economic Research, Inc.
    5. Goldman, Eitan & Slezak, Steve L., 2006. "An equilibrium model of incentive contracts in the presence of information manipulation," Journal of Financial Economics, Elsevier, vol. 80(3), pages 603-626, June.
    6. Bergstresser, Daniel & Philippon, Thomas, 2006. "CEO incentives and earnings management," Journal of Financial Economics, Elsevier, vol. 80(3), pages 511-529, June.
    7. Burns, Natasha & Kedia, Simi, 2006. "The impact of performance-based compensation on misreporting," Journal of Financial Economics, Elsevier, vol. 79(1), pages 35-67, January.
    8. Shane A. Johnson & Harley E. Ryan & Yisong S. Tian, 2009. "Managerial Incentives and Corporate Fraud: The Sources of Incentives Matter," Review of Finance, European Finance Association, vol. 13(1), pages 115-145.
    9. Ross, Stephen A, 1973. "The Economic Theory of Agency: The Principal's Problem," American Economic Review, American Economic Association, vol. 63(2), pages 134-139, May.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Andergassen, Rainer, 2016. "Managerial compensation, product market competition and fraud," International Review of Economics & Finance, Elsevier, vol. 45(C), pages 1-15.
    2. Loyola, Gino & Portilla, Yolanda, 2020. "Managerial compensation as a double-edged sword: Optimal incentives under misreporting," International Review of Economics & Finance, Elsevier, vol. 69(C), pages 994-1017.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Carola Frydman & Dirk Jenter, 2010. "CEO Compensation," Annual Review of Financial Economics, Annual Reviews, vol. 2(1), pages 75-102, December.
    2. Loyola, Gino & Portilla, Yolanda, 2020. "Managerial compensation as a double-edged sword: Optimal incentives under misreporting," International Review of Economics & Finance, Elsevier, vol. 69(C), pages 994-1017.
    3. Erik Devos & William B. Elliott & Richard S. Warr, 2018. "The Propensity to Split and CEO Compensation," Financial Management, Financial Management Association International, vol. 47(1), pages 105-129, March.
    4. Andergassen, Rainer, 2008. "High-powered incentives and fraudulent behavior: Stock-based versus stock option-based compensation," Economics Letters, Elsevier, vol. 101(2), pages 122-125, November.
    5. Jeff Boone & Inder Khurana & K. Raman, 2011. "Investor pricing of CEO equity incentives," Review of Quantitative Finance and Accounting, Springer, vol. 36(3), pages 417-435, April.
    6. Benson, Bradley W. & Lian, Qin & Wang, Qiming, 2016. "Stock ownership guidelines for CEOs: Do they (not) meet expectations?," Journal of Banking & Finance, Elsevier, vol. 69(C), pages 52-71.
    7. Ng, Lilian & Sibilkov, Valeriy & Wang, Qinghai & Zaiats, Nataliya, 2011. "Does shareholder approval requirement of equity compensation plans matter?," Journal of Corporate Finance, Elsevier, vol. 17(5), pages 1510-1530.
    8. 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.
    9. Wu, Yan Wendy, 2011. "Optimal executive compensation: Stock options or restricted stocks," International Review of Economics & Finance, Elsevier, vol. 20(4), pages 633-644, October.
    10. Pierre Chaigneau, 2010. "The Optimal Timing of Executive Compensation," FMG Discussion Papers dp660, Financial Markets Group.
    11. Zhou, Fangzhao & Zhang, Zenan & Yang, Jun & Su, Yunpeng & An, Yunbi, 2018. "Delisting pressure, executive compensation, and corporate fraud: Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 48(C), pages 17-34.
    12. Habib Jouber, 2016. "The relationship between CEO performance-based compensation and shareholders value creation: a cross national analysis," International Journal of Managerial and Financial Accounting, Inderscience Enterprises Ltd, vol. 8(1), pages 1-22.
    13. Li, Xingli & Pukthuanthong, Kuntara & Glenn Walker, Marcus & Walker, Thomas John, 2016. "The determinants of IPO-related shareholder litigation: The role of CEO equity incentives and corporate governance," Journal of Financial Markets, Elsevier, vol. 31(C), pages 81-126.
    14. Wei Zhang & Steven F. Cahan, 2010. "Nonrecurring Accounting Transactions and Stock Option Grants," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 37(1-2), pages 93-129.
    15. Efraim Benmelech & Eugene Kandel & Pietro Veronesi, 2010. "Stock-Based Compensation and CEO (Dis)Incentives," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 125(4), pages 1769-1820.
    16. Lars Helge Hass & Monika Tarsalewska & Feng Zhan, 2016. "Equity Incentives and Corporate Fraud in China," Journal of Business Ethics, Springer, vol. 138(4), pages 723-742, November.
    17. Rose, Anna M. & Rose, Jacob M. & Suh, Ikseon & Ugrin, Joseph C., 2017. "Unanticipated effects of restricted stock on managers' risky investment decisions," Advances in accounting, Elsevier, vol. 38(C), pages 106-112.
    18. Agrawal, Anup & Cooper, Tommy, 2015. "Insider trading before accounting scandals," Journal of Corporate Finance, Elsevier, vol. 34(C), pages 169-190.
    19. Habib Jouber & Hamadi Fakhfakh, 2011. "Does CEOs Performance-based Compensation Waits on Shareholders? A Cross National Analysis," International Journal of Business Administration, International Journal of Business Administration, Sciedu Press, vol. 2(3), pages 68-82, August.
    20. Kim, Jeong-Bon & Li, Yinghua & Zhang, Liandong, 2011. "CFOs versus CEOs: Equity incentives and crashes," Journal of Financial Economics, Elsevier, vol. 101(3), pages 713-730, September.

    More about this item

    Keywords

    Corporate governance; stock options; incentives; contract design; fraud;
    All these keywords.

    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ebl:ecbull:eb-13-00143. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: John P. Conley (email available below). General contact details of provider: .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.