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

David Bruner, Michael McKee and Rudy Santore ()
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Rudy Santore: Department of Economics, College of Business Administration, Stokely Management Center, 1000 Volunteer Boulevard, University of Tennessee, Knoxville, TN 37996, USA

Southern Economic Journal, 2008, vol. 75, issue 1, pages 261-278

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.

JEL-codes: G34 C91 (search for similar items in EconPapers)
Date: 2008
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Persistent link: http://EconPapers.repec.org/RePEc:sej:ancoec:v:75:1:y:2008:p:261-278

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