Incentives to Cheat: The Influence of Executive Compensation and Firm Performance on Financial Misrepresentation
Organization Science, Vol. 18, No. 3, pp. 350-367
51 Pages Posted: 4 Sep 2007 Last revised: 5 Feb 2008
Date Written: October 2006
Despite the many undesirable outcomes of corporate misconduct, scholars have an inadequate understanding of corporate misconduct's causes and mechanisms. We extend the behavioral theory of the firm, which traditionally assumes away the possibility of firm impropriety, to develop hypotheses predicting that top management incentive compensation and poor organizational performance relative to aspirations increase the likelihood of financial misrepresentation. Using a sample of financial restatements prompted by accounting irregularities and identified by the U.S. Government Accountability Office, we find empirical support for both incentive and relative performance influences on financial statement misrepresentation.
Keywords: corporate misconduct, behavioral theory, executive compensation, relative performance
JEL Classification: D83, G30, M52
Suggested Citation: Suggested Citation