Executive compensation, earnings management and shareholder litigation

Original Research


This paper examines the effects of executive compensation and potential for earnings management on the incidence of shareholder class action lawsuits and their outcomes. Although damage measurement factors, managerial option intensity, and earnings management all significantly affect the probability of lawsuits, they differ in their influence on the likelihood of positive settlement and on settlement amount: Damage factors do not affect the likelihood of settlement versus dismissal. High option intensity raises the probability of positive settlement, but does not affect its amount. High earnings management, on the other hand, does not affect the likelihood of settlement, but does increase settlement amount. These findings suggest that factors typically used to explain shareholder lawsuits should be interpreted with care.


Compensation Stock options Fraud Shareholder lawsuits 

JEL Classification

J33 K22 M41 



We appreciate the helpful comments of an anonymous referee, Fabrizio Ferri, Robert Mathieu, and session participants at Eastern Finance Association and Midwest Finance Association conferences. Yan Wendy Wu gratefully acknowledges the financial support of Laurier Center for Economic Research and Policy Analysis and a grant partly funded by WLU Operating funds, and partly by the SSHRC General Research Grant awarded to WLU. All errors are our responsibility.


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Copyright information

© Springer Science+Business Media, LLC 2009

Authors and Affiliations

  1. 1.Department of EconomicsSimon Fraser UniversityBurnabyCanada
  2. 2.School of Business & EconomicsWilfrid Laurier UniversityWaterlooCanada

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