Three essays on accounting fraud

This thesis consists of three empirical papers that investigate the impacts of equity incentives on accounting fraud from the perspective of the risk it presents for CEOs and controlling shareholders. As a prerequisite for this thesis, the first paper investigates whether AAERs constitute a reliable accounting fraud database, despite their partial coverage of misreporting cases and the resource constraints of the SEC. Using comprehensive samples covering three financial misreporting databases from the U.S., I find that, compared to securities class action lawsuits and restatements, AAERs are composed of firms that are more likely to represent material accounting irregularities, which are characterised by aggressive adoption of accruals, strong financing needs, and significant market impact of misreporting cases. The second paper investigates whether CEOs change their misreporting behaviours at higher levels of equity incentives, at which they may begin to seriously consider the risk side of incentives. Using both unmatched and matched accounting fraud samples from the U.S., I find that, contrary to misreporting patterns at average equity incentives, CEOs’ option delta is negatively associated with accounting fraud propensity, whereas their stock ownership is positively related to this at respectively higher levels. The third paper examines the extent to which, in the context of accounting fraud, controlling shareholders’ control-ownership wedge interacts with their ownership concentration - a common feature of business groups - and with the additional imposition of government regulation on Korean chaebols. Using matched samples from Korea, I find that control-ownership wedge is positively associated with accounting fraud propensity, whereas business group and chaebol affiliations are not. Overall, the results suggest that the impacts of equity incentives on accounting fraud propensity hinge critically on how CEOs and controlling shareholders perceive the risk of accounting fraud commitment