Tournament incentives and corporate fraud

Hass, Lars Helge and Müller, Maximilian and Vergauwe, Skralan (2015) Tournament incentives and corporate fraud. Journal of Corporate Finance, 34. pp. 251-267. ISSN 0929-1199

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    Abstract

    This paper identifies a new incentive for managers to engage in corporate fraud stemming from the relative performance evaluation feature of CEO promotion tournaments. We document higher propensities to engage in fraud for firms with strong tournament incentives (as proxied for by the CEO pay gap). We posit that the relative performance evaluation feature of CEO promotion tournaments creates incentives to manipulate performance, while the option-like character can motivate managers to engage in risky activities. We thereby extend previous corporate fraud literature that focuses mainly on equity-based incentives and reports mixed findings. Our results are robust to using different fraud samples, and controlling for other known determinants of fraud as well as manager skills.