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1、Theimpactofperformance-basedcompensationonmisreporting*NatashaBurnsandSimiKedia*BurnsisatUniversityofGeorgia,TerryCollegeofBusiness,Athens,GA.30602,e-mail:nburns@uga.edu.KediaisatHarvardUniversity,HarvardBusinessSchool,Boston,MA02163,e-mail:skedia@hbs.edu.Thispapercombinestheresultsoftwoe
2、arlierpapers:“Doesperformance-basedcompensationexplainrestatements”byNatashaBurnsand“DoExecutiveStockOptionsGenerateIncentivesforEarningsManagement?EvidencefromAccountingRestatements”bySimiKedia.WethankJeanHelwege,AndrewKarolyi,andRenéStulzfortheircommentsandadvice.WealsothankJimHsieh,Kos
3、eJohn,StevenKaplan,KevinMurphy,Prabhala,JeremyStein,ChristofStahel,RalphWalking,KarenWruck,DavidYermack,participantsatthe2003NBERUniversitiesResearchConferenceofCorporateGovernance,the2004AFAMeetingsinSanDiego,seminarsatArizonaStateUniversity,BaruchCollege,IndianaUniversity,OhioStateUnive
4、rsity,PennStateUniversity,RiceUniversity,RutgersUniversity,SouthernMethodistUniversity,UniversityofGeorgetown,UniversityofHouston,UniversityofIllinois,andUniversityofPittsburghforhelpfulcomments.Allerrorsaretheresponsibilityoftheauthors.TheImpactofperformance-basedcompensationonmisreporti
5、ngAbstractThispaperexaminestheeffectofCEOcompensationcontractsonmisreporting.WefindthatthesensitivityoftheCEO’soptionportfoliotostockpriceissignificantlypositivelyrelatedtothepropensitytomisreport.WedonotfindthatthesensitivityofothercomponentsofCEOcompensation,i.e.,equity,restrictedstock,
6、long-termincentivepayoutsandsalaryandbonushaveanysignificantimpactonthepropensitytomisreport.Relativetoothercomponentsofcompensation,stockoptionsareassociatedwithstrongerincentivestomisreportbecauseconvexityinCEOwealthintroducedbystockoptionslimitsthedownsideriskondetectionofthemisreporti
7、ng.Keywords:Restatements;Misreporting,compensation,optionsJELClassificationCode:G30,G32,G341.IntroductionInSeptember1998,ArthurLevitt,thethenchairmanoftheSEC,remarkedthatthedesireofexecutivestoincreasethevalueoftheirstockoptionsgavethemanincentivetomanipulatetheirac
