FINANCIAL MISREPRESENTATION, EXECUTIVE COMPENSATION, AND FIRM PERFORMANCE: AN EMPIRICAL STUDY.

Abstract

Financial misrepresentation is a grave, yet prevalent form of corporate misconduct. With its self-evident detrimental consequences of both an economic and social nature, misrepresentation is an organizational action that begs further study. We observe that this form of misconduct is influenced by both behavioral and agency forces. Using a matched sample design, we find that firms with performance below their industry's average performance, firms with performance significantly above their own past performance, or firms whose CEOs have high proportions of stock option compensation are more likely to misrepresent their financial position than other firms.