An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Jap Efendi
California Polytechnic State University

Anup Srivastava
Texas A&M University

Edward P Swanson
Texas A&M University

Abstract: We investigate incentives that led to the rash of restated financial statements at the end of the 1990s market bubble. We find the likelihood of a misstated financial statement increases greatly when the CEO has a very sizable amount of stock options “in-the-money” (i.e., stock price above exercise price). Misstatements are also more likely for firms that are constrained by an interest-coverage debt covenant, raise new debt or equity capital, or have a CEO who serves as board chair. Further, we find that CEOs at restating firms exercised a higher dollar value of options compared to CEOs at matched firms. Our results support Jensen’s (2005) argument that substantially overvalued equity during the late 1990s caused managers to take actions to support the stock price and those actions increased agency costs.

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