Abstract
The paper examines the role of executive compensation in inducing management behavior that triggers private securities litigation. Incentive pay in the form of options is found to increase the probability of securities class action lawsuits, holding constant a wide range of other firm characteristics. In contrast, base pay levels and restricted stock grants do not have a significant impact on lawsuit incidence. Firms whose executives hold restricted stock only, and no options, induce less shareholder litigation. Our results suggest that option-based compensation may give executives too strong an incentive to target the short term share price, which may be harmful to long term shareholder value. We further identify earnings manipulation as an important channel linking compensation and litigation: incentive pay has a significant impact on earnings manipulation, which in turn significantly affects the probability of litigation. However, our accrual-based measure of manipulation does not capture the full impact of compensation on litigation, suggesting other channels are important.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
