Christopher Armstrong, David Larcker, Gaizka Ormazabal, Daniel Taylor (2013). The relation between equity incentives and misreporting: the role of risk-taking incentives

Christopher Armstrong, David Larcker, Gaizka Ormazabal, Daniel Taylor


“THE RELATION BETWEEN EQUITY INCENTIVES AND
MISREPORTING: THE ROLE OF RISK-TAKING
INCENTIVES”
(2013).

, MAIN IDEA
This paper examines how executive equity incentives a ect the likelihood of inancial misreporting.


The key argument is that misreporting is primarily driven not by the sensitivity of managers’ wealth to stock price (delta),
but by the sensitivity of their wealth to irm risk (vega).


Delta provides incentives to increase stock price.
Vega provides incentives to increase risk.



Managers with higher vega are less risk-averse and therefore more willing to engage in risky actions such as inancial
misreporting.



Research question:

Do risk-taking incentives (vega) explain inancial misreporting better than traditional price incentives (delta)?




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