Incentive alignment, control, and the issue of misleading financial disclosures

The accounting scandals of recent years have raised concerns about the efficacy of incentive alignment and control systems. Among matched firms that either did or did not restate misleading financial disclosures during the period 1994-2003, both managerial equity ownership and contingent compensation were positively related to restatements when considered independently of other factors such as firm performance and board characteristics. When these variables were introduced, performance positively moderated the relationship between ownership and restatements, although contingent compensation was no longer significant. Finally, misleading disclosures were less prevalent in firms whose boards had high levels of business experience and long tenure.