Study: The More Execs Rely on Stock for Compensation, The More They Downplay Accounting Mistakes

Chris Gaetano
Published Date:
Sep 2, 2016

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A recent study has found that the more stock-based compensation makes up an executive's pay, the more likely that executive will seek to downplay or obscure accounting mistakes, according to MarketWatch. This is likely because doing so can maximize their income and minimize losses. 

"Using a sample of 1,178 restatements from the years 2004 through 2013, our results show that as the equity proportion of executive pay increases, the likelihood of a high-transparency disclosure decreases. However, as the difference in pay structure between the CEO and CFO increases, the likelihood of a high-transparency disclosure increases. Overall, our results suggest that executive pay structure influences disclosure choice and that pay structure differences between the CEO and CFO may mitigate such influence," said the study's abstract

This means that they're more reluctant to, say, file an 8-K with the SEC, or to warn investors that they should not rely on previous erroneous financial information, both of which could have deleterious effects on the company's stock. MarketWatch said this also gives them more time to manage stock sales to maximize their income, minimize damage to their reputation, and find ways to not lose their jobs. The study's authors said there needs to be a bright line interpretation of what actions are needed when there is a misstatement, as they believe current standards for when investors need to be informed of a mistake are too ambiguous, allowing executives to obscure them. 

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