David F. Larcker is the Director of the Corporate Governance Research Program at the Stanford Graduate School of Business.
In our forthcoming Journal of Accounting Research paper, Chief Executive Officer Equity Incentives and Accounting Irregularities, we examine the relationship between chief executive officer (CEO) equity incentives and accounting irregularities (e.g., restatements, Securities and Exchange Commission Accounting and Auditing Enforcement Releases, and shareholder class action lawsuits). Although equity holdings may alleviate certain agency problems between executives and shareholders, concerns have arisen among researchers, regulators, and the business press that “high-powered” equity incentives might also motivate executives to manipulate accounting information for personal gain. This view assumes that stock price is a function of reported earnings and that executives manipulate accounting earnings to increase the value of their personal equity holdings. If this allegation is true and the economic cost of accounting manipulation is large, this idea has important implications for executive-compensation contract design and corporate monitoring by both internal and external parties.