Who Did it Matters: Executive Equity Compensation and Financial Reporting Fraud

Robert H. Davidson
Pamplin School of Business, Virginia Polytechnic Institute and State University

Abstract

In within-firm analysis of 1,805 executives, executives implicated in financial reporting fraud cases have significantly stronger equity incentives than their within-firm peers who are not implicated in the fraud. Executives implicated in fraud cases also have significantly stronger equity incentives than executives at non-fraud firms in similar roles. However, the equity incentives of non-implicated executives at fraud firms are no different than those for executives at non-fraud firms. The results are significant across executive roles and for equity incentives measured as wealth sensitivity to changes in stock price or stock price volatility. Executive-level analysis that considers which executives are implicated in the fraud may provide more precise measurement of the association and statistical significance of the relationship between equity incentives and fraud. Finally, firm-level measures that consider the equity incentives of all members of the top management team may better identify fraud firms than do measures focusing on one executive.

Keywords: Financial reporting fraud, equity compensation, executive equity incentives.

JEL Classification Codes: G30, G34, G38, G39.

Post print manuscript

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