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 Mathematical confirmation: Rewiring financial networks reduces systemic risk
22.06.2017 | International Institute for Applied Systems Analysis (IIASA)

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

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: Neutron star merger directly observed for the first time

University of Maryland researchers contribute to historic detection of gravitational waves and light created by event

On August 17, 2017, at 12:41:04 UTC, scientists made the first direct observation of a merger between two neutron stars--the dense, collapsed cores that remain...

Im Focus: Breaking: the first light from two neutron stars merging

Seven new papers describe the first-ever detection of light from a gravitational wave source. The event, caused by two neutron stars colliding and merging together, was dubbed GW170817 because it sent ripples through space-time that reached Earth on 2017 August 17. Around the world, hundreds of excited astronomers mobilized quickly and were able to observe the event using numerous telescopes, providing a wealth of new data.

Previous detections of gravitational waves have all involved the merger of two black holes, a feat that won the 2017 Nobel Prize in Physics earlier this month....

Im Focus: Smart sensors for efficient processes

Material defects in end products can quickly result in failures in many areas of industry, and have a massive impact on the safe use of their products. This is why, in the field of quality assurance, intelligent, nondestructive sensor systems play a key role. They allow testing components and parts in a rapid and cost-efficient manner without destroying the actual product or changing its surface. Experts from the Fraunhofer IZFP in Saarbrücken will be presenting two exhibits at the Blechexpo in Stuttgart from 7–10 November 2017 that allow fast, reliable, and automated characterization of materials and detection of defects (Hall 5, Booth 5306).

When quality testing uses time-consuming destructive test methods, it can result in enormous costs due to damaging or destroying the products. And given that...

Im Focus: Cold molecules on collision course

Using a new cooling technique MPQ scientists succeed at observing collisions in a dense beam of cold and slow dipolar molecules.

How do chemical reactions proceed at extremely low temperatures? The answer requires the investigation of molecular samples that are cold, dense, and slow at...

Im Focus: Shrinking the proton again!

Scientists from the Max Planck Institute of Quantum Optics, using high precision laser spectroscopy of atomic hydrogen, confirm the surprisingly small value of the proton radius determined from muonic hydrogen.

It was one of the breakthroughs of the year 2010: Laser spectroscopy of muonic hydrogen resulted in a value for the proton charge radius that was significantly...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

Event News

ASEAN Member States discuss the future role of renewable energy

17.10.2017 | Event News

World Health Summit 2017: International experts set the course for the future of Global Health

10.10.2017 | Event News

Climate Engineering Conference 2017 Opens in Berlin

10.10.2017 | Event News

 
Latest News

Ocean atmosphere rife with microbes

17.10.2017 | Life Sciences

Neutrons observe vitamin B6-dependent enzyme activity useful for drug development

17.10.2017 | Life Sciences

NASA finds newly formed tropical storm lan over open waters

17.10.2017 | Earth Sciences

VideoLinks
B2B-VideoLinks
More VideoLinks >>>