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    Why do corporate managers misstate financial statements? The role of in-the-money options and other incentives

    Author(s):

    Efendi, Jap, Anup Srivastava and Edward P. Swanson

    Date:

    2007

    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.

    Citation:

    Efendi, Jap, Anup Srivastava and Edward P. Swanson. 2007. Why do corporate managers misstate financial statements? The role of in-the-money options and other incentives. Journal of Financial Economics. 85(3): 667-708.

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