Melbourne Accounting Research Seminar - Assistant Professor Yachang Zeng

Assistant Professor Yachang Zeng from Nanyang Technological University will present a MARS seminar.

Topic: Equity Incentives and Financial Misreporting: Evidence from CEOs’ Motive for Pursuing Personal Wealth

Abstract: The sensitivity of CEOs’ wealth to changes in stock price (portfolio delta) has two countervailing incentive effects: (1) a “reward effect” that encourages misreporting for enhancing CEOs’ wealth, and (2) a “risk effect” that discourages misreporting because misreporting would increase equity risk and CEOs’ wealth volatility. Understanding the net outcome of the tradeoff is important for executive compensation design. We therefore study a unique setting related to CEO wealth, in which this reward-risk tradeoff is salient. We document that misreporting driven by the CEO’s wealth-pursuing motive is substantial in numbers and is positively explained by delta. Our findings suggest that delta’s “reward effect”, on average, outweighs its “risk effect”. We also provide a new perspective to revisit the mixed delta-misreporting association.