Please use this identifier to cite or link to this item: http://hdl.handle.net/10397/18368
Title: Cumulative prospect theory and managerial incentives for fraudulent financial reporting
Authors: Fung, MK 
Issue Date: 2015
Publisher: Wiley-Blackwell
Source: Contemporary accounting research, 2015, v. 32, no. 1, p. 55-75 How to cite?
Journal: Contemporary Accounting Research 
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.
URI: http://hdl.handle.net/10397/18368
ISSN: 0823-9150
DOI: 10.1111/1911-3846.12074
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