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Managerial Incentives, Fraud, and Monitoring
Author(s) -
Robison H. David,
Santore Rudy
Publication year - 2011
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/j.1540-6288.2011.00300.x
Subject(s) - incentive , commit , damages , business , equity (law) , audit , ex ante , compensation (psychology) , active monitoring , actuarial science , finance , accounting , economics , microeconomics , computer science , law , real time computing , psychology , database , political science , psychoanalysis , macroeconomics
In response to equity compensation contracts that encourage managers to commit fraud as well as provide productive effort, owners may choose to monitor the manager to limit the fraud. We examine the firm owners’ incentives to perform both ex ante monitoring, such as internal controls, and ex post monitoring, such as audits, in a model that includes the reputational damages caused when a fraud is discovered. We provide conditions under which the owner prefers either more or less monitoring, and examine the effect of additional monitoring on the optimal equity package and equilibrium level of fraud.