Control and Corporate Performance –

Abstract

The turn of the millennium is associated with increased corporate fraud, largely attributed to the failure of corporate governance. The compensation committee is expected to minimize fraud by rewarding only appropriate CEO behavior. A causal modeling approach, the Directed Acyclic Graph, was used to estimate the structure of corporate fraud. Corporate fraud was measured as illegal earnings statement(s), not all restatements but only those found illegal. A major finding is that the CEO’s stock-option compensation motivates the CEO to commit corporate earnings fraud, while cash salaries and bonuses are only indirectly related to earnings fraud through those stock options. Copyright r 2010 John Wiley & Sons, Ltd. A requirement of for-profit, publicly traded corpora-tions is that they maintain governing boards of directors that are, in part, designed to monitor chief executives to minimize fraud. These boards are created to meet specific legal requirements that ensure the boards ’ independence of executive man-agers. Yet, fraud was never more prevalent than in the last decade of the 20th and a turn of the 21st Century. After decades of boom and bust and the high incidence of corporate crime throughout the 1990s, the ability of boards of directors to control their top management was in question. This period of corporate crime began with the crash of numerous dotcoms, with their innovative accounting techni-ques, in 2000 (Clark et al., 2003), followed by th