The Impact of Shareholder Litigation Risk On Equity Incentives : Evidence From A Natural Experiment

Research output: Conference Papers (RGC: 31A, 31B, 32, 33)33_Other conference paperpeer-review

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Detail(s)

Original languageEnglish
Publication statusPresented - 8 Jul 2019

Conference

Title2019 Accounting and Finance Association of Australia and New Zealand Conference (AFAANZ 2019)
PlaceAustralia
CityBrisbane
Period7 - 9 July 2019

Abstract

While prior studies generally support that equity-based compensation induces CEOs to manipulate financial reporting, there is limited direct empirical evidence on whether financial misreporting concerns affect compensation design. A key challenge for establishing a causal relationship is that misreporting incentives and compensation policies are often endogenously determined. Exploiting the exogenous reduction in litigation threat following a 1999 ruling of the U.S. Ninth Circuit Court of Appeals, we examine how heightened misreporting concerns affect CEOs’ compensation design. Consistent with the theoretical prediction that misreporting concerns prevent companies from providing more powerful incentive pay that is otherwise optimal, we find that firms headquartered in Ninth Circuit states decreased CEOs’ equity portfolio vega relative to the control firms after the ruling. We further document that this reduction was more pronounced for firms subject to high ex-ante risk of meritorious litigation and less pronounced for firms prone to frivolous lawsuits.

Bibliographic Note

Information for this record is supplemented by the author(s) concerned.

Citation Format(s)

The Impact of Shareholder Litigation Risk On Equity Incentives : Evidence From A Natural Experiment. / Zheng, Liu; Yang, Jingyu; Yu, Yangxin.

2019. 2019 Accounting and Finance Association of Australia and New Zealand Conference (AFAANZ 2019), Brisbane, Queensland, Australia.

Research output: Conference Papers (RGC: 31A, 31B, 32, 33)33_Other conference paperpeer-review