City Research Online

Abstract

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 https://creativecommons.org/licenses/by-nc-nd/4.0/(opens 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

Export

Downloads