2009 Reports

The Financial Crisis of 2007-2008 and its Macroeconomic Consequences

Stiglitz, Joseph E.

Executive compensation schemes (combined with bank accounting regulations) encouraged the provision of misleading information—booking income "above the line," while retaining liabilities off the balance sheet. Executives that are paid with stock options have an incentive to increase the market value of shares, and this may be more easily done by increasing reported income than by increasing true profits. Though Sarbanes-Oxley fixed some of the problems that were uncovered in the Enron and related scandals, it did nothing about stock options. With stock options not being expensed, shareholders often were not fully apprised of their cost. This provides strong incentives to pay exorbitant compensation through stock options. But the use of stock options encourages bad accounting practices.