Equity-based incentive contracts and behavior: Experimental evidence

Equity-based incentive contracts provide managers with dual incentives, motivating both effort and fraud. We report the results from an experiment in which manager subjects make effort and fraud decisions that affect a firm's value. The main treatment variable is the incentive contract, which can be of either the simple equity or stock option type. We find that both effort and fraud are increasing in a manager's share of equity and decreasing in the strike price of an option. Interestingly, the stock option contract induces relatively more fraud than the simple equity contract, even though the two induce the same effort.