Predicting Misleading Disclosures: The Effects of Control, Pressure, and Compensation

摘要

The use of stock options is being blamed for the proliferation of misleading financial disclosures, but executive greed is only part of the problem. This work draws on related streams of research to identify the contingencies that create conditions whereby managers are likely to produce misleading information. We argue that the locus of control, in the form of owner or manager control of the firm, and the method of control, either strategic or financial, combine with managerial self-interest to create the necessary conditions for that to occur. Specifically, owner control and the use of strategic controls create pressure for performance, which gives managers an incentive to protect their employment capital; managerial control and the use of financial controls allow managers to capitalize on incomplete employment contracts and thus abuse short-term contingent compensation. This work not only has governance implications, but also points to weaknesses in the logic of some of the currently popular suggestions for reducing the incidence of misleading disclosures.