[This study investigates the relationship between insider trading and fraud. We find that in the presence of fraud, insiders reduce their holdings of company stock through high levels of selling activity as measured by either the number of transactions, the number of shares sold, or the dollar amount of shares sold. Moreover, we present evidence that a cascaded logit model, incorporating insider trading variables and firm-specific financial characteristics, differentiates companies with fraud from companies without fraud.]

Abstract This study investigates the relationship between insider trading and fraud. We find that in the presence of fraud, insiders reduce their holdings of company stock through high levels of selling activity as measured by either the number of transactions, the number of shares sold, or the dollar amount of shares sold. Moreover, we present evidence that a cascaded logit model, incorporating insider trading variables and firm-specific financial characteristics, differentiates companies with fraud from companies without fraud.

We examine how two attributes of preventive and detective controls affect employee performance and employee motivation. Specifically, we examine how the extent to which controls (1) restrict employees’ autonomy, and (2) provide more or less timely feedback impacts employees’ performance and intrinsic motivation. These characteristics are the defining differences between preventive and detective controls in that preventive controls restrict employee autonomy relative to detective controls and preventive controls always provide immediate feedback; whereas, detective controls can provide either immediate feedback or delayed feedback. We conduct an experiment to examine how and why these two types of formal controls impact employees’ performance in an incomplete contract setting in which one dimension of the employees’ task is compensated and one dimension is controlled. The results show that detective controls with more timely feedback improve employees’ performance toward the control objective, without affecting their intrinsic motivation. In contrast, the restriction of autonomy associated with preventive controls, has no additional effect on employees’ performance toward the control objective over detective controls with timely feedback but significantly reduces employees’ motivation. Neither control characteristic has a significant effect on employees’ performance on the compensated dimension of the task, suggesting that monetary incentives continue to provide an effective motivation. Our results reveal the importance of designing and implementing controls that provide timely feedback but do not restrict autonomy.