Why do corporate managers misstate financial statements? The role of option compensation and other factors Academic Article uri icon

abstract

  • We investigate the incentives that led to the rash of restated financial statements at the end of the 1990s market bubble. We find that the likelihood of a misstated financial statement increases greatly when the CEO has very sizable holdings of in-the-money stock options. Misstatements are also more likely for firms that are constrained by an interest-coverage debt covenant, that raise new debt or equity capital, or that have a CEO who serves as board chair. Our results indicate that agency costs increased [Jensen, M.C., 2005a, Agency costs of overvalued equity. Financial Management 34, 5-19] as substantially overvalued equity caused managers to take actions to support the stock price. 2007 Elsevier B.V. All rights reserved.

published proceedings

  • JOURNAL OF FINANCIAL ECONOMICS

altmetric score

  • 6

author list (cited authors)

  • Efendi, J., Srivastava, A., & Swanson, E. P.

citation count

  • 696

complete list of authors

  • Efendi, Jap||Srivastava, Anup||Swanson, Edward P

publication date

  • January 2007