City Research Online

A concave relation between equity-based incentives and misreporting

Hwan Ahn, J., Zulfiqar Ali Shah, S. & Park, G. ORCID: 0000-0002-1009-7462 (2023). A concave relation between equity-based incentives and misreporting. Journal of Accounting and Public Policy, 42(5), article number 107134. doi: 10.1016/j.jaccpubpol.2023.107134


A fraud mechanism, where managers inflate stock prices via misreporting for post-misreporting insider trading, is well captured by the delta of their equity portfolio. But a widely accepted view in the literature is that the impact of delta on misreporting is unclear because delta-related rewards (e.g., gains from insider trading) and risks (e.g., detection of fraud) likely offset each other. In this paper, we predict and find a concave association between managers’ portfolio delta and misreporting propensity, and the misreporting curve’s changing maximum points depending on the levels of various risk and reward factors. Our results are consistent with managers who reduce opportunistic misreporting at a higher level of equity incentives to avoid the increasing marginal costs of misreporting.

Publication Type: Article
Additional Information: © 2023. This manuscript version is made available under the CC-BY-NC-ND 4.0 license in new tab/window)
Publisher Keywords: Financial misreporting, Equity-based incentives, Risk-taking incentives, Enforcement risk, Securities fraud
Subjects: H Social Sciences > HG Finance
Departments: Bayes Business School > Finance
[thumbnail of Manuscript_accepted.pdf] Text - Accepted Version
This document is not freely accessible until 29 August 2025 due to copyright restrictions.
Available under License Creative Commons Attribution Non-commercial No Derivatives.

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