An article about corporate fraud on forbes.com stated that "misleading accounting and disclosure practices weaken the integrity of capital markets." The article noted that using incentive contracts for top managers can create a "‘perverse' incentive to manipulate stock prices because their (executive) total package is based on stock price appreciation."
a. Why do financial markets depend on accurate accounting and disclosure practices? Why can misleading accounting and disclosure practices weaken the integrity of financial markets?
b. Why do corporate boards of directors sometimes link top managers' compensation to the corporations' stock prices? Briefly explain how tying compensation too closely to stock prices might create an incentive for corporate fraud.
Source: John Wasik, "How Corporate Fraud Costs You Money: Four Red Flags," forbes.com, June 17, 2013.