The Effect of CEO Cash-based Compensation on Accounting Fraud

Abstract

This paper investigates whether CEO cash-based compensation mitigates or promotes accounting fraud in publicly listed U.S. firms. Using logistic regression on a sample from 1992–2023, we find a significant negative association between cash-based compensation and fraud likelihood, indicating that a higher proportion of cash pay may reduce incentives for fraudulent financial reporting. Our findings highlight the importance of compensation structure, showing that cash-based pay can moderate fraud risks associated with other forms of compensation. This study contributes to the literature by examining the often-overlooked role of cash-based compensation in reducing fraud risk, offering empirical support for more balanced CEO pay structures. These insights have practical implications for corporate governance, suggesting that structuring CEO compensation with a greater emphasis on cash could enhance long-term stability and reduce incentives for fraudulent practices.