Do CEO Stock Options Prevent or Promote Fraudulent Financial Reporting?

We contrast the conventional view that CEO stock options aid corporate governance by reducing moral hazard with the proposal that CEO stock options may subvert sound corporate governance. Views were tested in 65 matched pairs of public U.S. firms that either had or had not been discovered misreporting financial results. Our results support both the traditional perspective and our unprincipled agent view: in our sample, large CEO stock option grants were sometimes associated with a lower incidence of fraudulent reporting and sometimes with a greater incidence, depending upon whether CEO duality was present and whether directors also held stock options.