Forum for Science, Industry and Business

Sponsored by:     3M 
Search our Site:

 

Executive Stock Options Tied to Higher Fraud Rates, Says New INFORMS-Published Study

09.07.2007
Management incentives consisting mainly of stock options strongly increase the likelihood of financial misrepresentation, according to a new study in a publication of the Institute for Operations Research and the Management Sciences (INFORMS®).

“Incentives to Cheat: The Influence of Executive Compensation and Firm Performance on Financial Misrepresentation,” by Jared Harris, the Darden Graduate School of Business Administration, University of Virginia, and Philip Bromiley, Merage School of Business, University of California, Irvine, appears in the current issue of Organization Science, an INFORMS publication.

According to the authors, “Our results demonstrate two factors substantially increase the likelihood of financial misrepresentation: extremely low performance relative to average performance in the firm’s industry, and high percentages of CEO compensation in stock options.”

The study also determined that approximately 1 in 10 of the financial restatements examined by the authors was linked to fraud and illegal practices. Over five years, there was a 9% likelihood that a company misrepresents its finances and is discovered. The actual frequency of misrepresentation is almost certainly higher.

Stock options offer a strong incentive to raise the stock price above the strike price; indeed, the stock price must rise above the strike price for executives to profit from their options. This incentive motivates some executives to misrepresent financial outcomes to raise the stock price.

“Millions and sometimes tens of millions of dollars worth of CEO compensation ride on these stock options,” explained Prof. Bromiley. “That’s enough to motivate some executives to deliberately fudge the books so that stock prices go up.”

The authors found bonuses had little influence on misrepresentation. “Unlike with stock options,” they write, “we found no significant influence of bonuses on financial misrepresentation.” They note that options and bonuses offer different incentives and that options offer massively greater financial returns to CEO’s than bonuses do.

In addition to firms with high levels of stock options, firms with massive losses relative to their assets also tended to misrepresent their financials.

The authors examined financial restatements prompted by accounting irregularities identified by the U.S. Government Accountability Office (GAO). The GAO identified 919 such restatements announced between January 1997 and June 2002. According to the GAO, these particular restatements resulted from “aggressive accounting practices, misuse of facts, oversight or misinterpretation of accounting rules, and fraud.”

About INFORMS
The Institute for Operations Research and the Management Sciences (INFORMS®) is an international scientific society with 10,000 members, including Nobel Prize laureates, dedicated to applying scientific methods to help improve decision-making, management, and operations. Members of INFORMS work in business, government, and academia. They are represented in fields as diverse as airlines, health care, law enforcement, the military, financial engineering, and telecommunications. The INFORMS website is www.informs.org. More information about operations research is at www.scienceofbetter.org.

Barry List | EurekAlert!
Further information:
http://www.informs.org
http://www.scienceofbetter.org

More articles from Business and Finance:

nachricht Frugal Innovations: when less is more
19.04.2017 | Fraunhofer-Institut für Arbeitswirtschaft und Organisation IAO

nachricht Europe's microtechnology industry is attuned to growth
10.03.2017 | IVAM Fachverband für Mikrotechnik

All articles from Business and Finance >>>

The most recent press releases about innovation >>>

Die letzten 5 Focus-News des innovations-reports im Überblick:

Im Focus: Wafer-thin Magnetic Materials Developed for Future Quantum Technologies

Two-dimensional magnetic structures are regarded as a promising material for new types of data storage, since the magnetic properties of individual molecular building blocks can be investigated and modified. For the first time, researchers have now produced a wafer-thin ferrimagnet, in which molecules with different magnetic centers arrange themselves on a gold surface to form a checkerboard pattern. Scientists at the Swiss Nanoscience Institute at the University of Basel and the Paul Scherrer Institute published their findings in the journal Nature Communications.

Ferrimagnets are composed of two centers which are magnetized at different strengths and point in opposing directions. Two-dimensional, quasi-flat ferrimagnets...

Im Focus: World's thinnest hologram paves path to new 3-D world

Nano-hologram paves way for integration of 3-D holography into everyday electronics

An Australian-Chinese research team has created the world's thinnest hologram, paving the way towards the integration of 3D holography into everyday...

Im Focus: Using graphene to create quantum bits

In the race to produce a quantum computer, a number of projects are seeking a way to create quantum bits -- or qubits -- that are stable, meaning they are not much affected by changes in their environment. This normally needs highly nonlinear non-dissipative elements capable of functioning at very low temperatures.

In pursuit of this goal, researchers at EPFL's Laboratory of Photonics and Quantum Measurements LPQM (STI/SB), have investigated a nonlinear graphene-based...

Im Focus: Bacteria harness the lotus effect to protect themselves

Biofilms: Researchers find the causes of water-repelling properties

Dental plaque and the viscous brown slime in drainpipes are two familiar examples of bacterial biofilms. Removing such bacterial depositions from surfaces is...

Im Focus: Hydrogen Bonds Directly Detected for the First Time

For the first time, scientists have succeeded in studying the strength of hydrogen bonds in a single molecule using an atomic force microscope. Researchers from the University of Basel’s Swiss Nanoscience Institute network have reported the results in the journal Science Advances.

Hydrogen is the most common element in the universe and is an integral part of almost all organic compounds. Molecules and sections of macromolecules are...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

Event News

Dortmund MST Conference presents Individualized Healthcare Solutions with micro and nanotechnology

22.05.2017 | Event News

Innovation 4.0: Shaping a humane fourth industrial revolution

17.05.2017 | Event News

Media accreditation opens for historic year at European Health Forum Gastein

16.05.2017 | Event News

 
Latest News

New approach to revolutionize the production of molecular hydrogen

22.05.2017 | Materials Sciences

Scientists enlist engineered protein to battle the MERS virus

22.05.2017 | Life Sciences

Experts explain origins of topographic relief on Earth, Mars and Titan

22.05.2017 | Physics and Astronomy

VideoLinks
B2B-VideoLinks
More VideoLinks >>>