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      Executive Compensation and Misconduct: Environmental Harm
      09 Feb 2016Working Paper Summaries

      Executive Compensation and Misconduct: Environmental Harm

      by Dylan Minor
      To what extent does executive compensation push firms into environmental law-breaking in particular and misconduct in general? This study finds that changing a CEO’s compensation from 100 percent stock to 100 percent options resulted in a 60 percent increased odds of environmental harm and close to a doubling of the magnitude of harm. We find similar results for financial accounting misconduct. A rule change making the higher powered incentives more costly for firms to provide reduced incidences.
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      Author Abstract

      We explore the relationship between managerial incentives and misconduct using the setting of environmental harm. We find that high-powered executive compensation can increase the odds of environmental law breaking by 40%–60% and the magnitude of environmental harm by over 100%. We document similar results for the setting of executive compensation and illegal financial accounting. Finally, we outline some managerial and policy implications to blunt these adverse incentive effects.

      Paper Information

      • Full Working Paper Text
      • Working Paper Publication Date: January 2016
      • HBS Working Paper Number: 16-076
      • Faculty Unit(s): Strategy
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