High powered Incentives and Fraudulent Behavior: Stock based versus Stock Option based Compensation

Andergassen, Rainer (2005) High powered Incentives and Fraudulent Behavior: Stock based versus Stock Option based Compensation. Bologna: Dipartimento di Scienze economiche DSE, p. 13. DOI 10.6092/unibo/amsacta/4748. In: Quaderni - Working Paper DSE (542). ISSN 2282-6483.
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Abstract

In this paper shareholders face the trade-off between providing managers with incentives to exert beneficial effort and to engage in costly fraudulent activity. We solve for the optimal compensation package, given that shareholders can either grant (restricted) stock or stock options and given fixed average compensation costs. We show that if the negative effect of fraud on the company’s value is sufficiently large then stock based compensation is optimal. Otherwise, stock option based compensation is optimal. Furthermore, we show that the fraud to effort ratio is increasing in the strike price and that the optimal strike price is decreasing in the size of the negative effects of fraud on the company’s value.

Abstract
Document type
Monograph (Working Paper)
Creators
CreatorsAffiliationORCID
Andergassen, Rainer
Keywords
executive compensation, stock options, restricted stock, fraud, incentives
Subjects
ISSN
2282-6483
DOI
Deposit date
01 Apr 2016 09:27
Last modified
01 Apr 2016 09:27
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