Changes in Executive Compensation Prior to Financial Misreporting

ABSTRACT This study examines changes in executive compensation during their tenure with financial misreporting firms and finds that executives in misreporting firms have higher compensation than those in control firms and a higher proportion of equity compensation across the entirety of their tenure. This process begins in the first year of an executive’s tenure and continues until the misreporting period. These findings are observed across executive roles and salary rankings. The findings also show that executives who perpetrate financial misreporting have pay packages different from those of other executives within the same firm. Finally, the results show the differences in how executives who perpetrate financial misreporting manage their portfolios of firm shares. They sell less of their accumulated equity during their tenure than other allegedly innocent individuals. JEL Classifications: M40; M41; M49; G30; G34; G39.