Cumulative prospect theory and managerial incentives for fraudulent financial reporting

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7 Citations (Scopus)

Abstract

Using samples of restating and nonrestating U.S. firms, the study empirically investigates the relationship between the incidence of fraudulent financial reporting and accounting-based performance outcomes. The outcomes are framed as gains and losses relative to a reference point, defined as the mean performance of industry peers. Consistent with cumulative prospect theory (CPT), the findings show that fraud incidence is positively (negatively) related to the probability of a loss (gain); more (less) sensitive to the probability of a loss (gain) (i.e., loss-aversion); and more (less) sensitive to an extra unit of the probability at a high- or low- (medium-) probability level (i.e., nonlinear probability weighting function). The study extends the fraudulent financial reporting literature by formulating fraud incidence as a function of performance outcomes using peer performance as a reference point. By testing CPT's individual-level behavioral implications on firm-level archival data, the study reconceptualizes the investigation of fraudulent financial reporting in terms of risk attitude and extends prior investigations of CPT from laboratory experiments to a real-world setting of fraudulent financial reporting.
Original languageEnglish
Pages (from-to)55-75
Number of pages21
JournalContemporary Accounting Research
Volume32
Issue number1
DOIs
Publication statusPublished - 1 Jan 2015

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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