Abstract
We investigate incentives that led to the rash of restated financial statements at the end of the 1990s market bubble. We find the likelihood of a misstated financial statement increases greatly when the CEO has very sizable holdings of stock options in-the-money (i.e., stock price above exercise price). Misstatements are also more likely for firms that are constrained by an interest-coverage debt covenant, raise new debt or equity capital, or have a CEO who serves as board chair. Our results indicate that agency costs increased (Jensen 2005a) as substantially overvalued equity caused managers to take actions to support the stock price.
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