Corporate Fraud, Governance and Auditing
AbstractWe analyze corporate fraud in a model in which managers have superior information but are biased against liquidation, because of their private benefits from empire building. This may induce them to misreport information and even bribe auditors when liquidation would be value-increasing. To curb fraud, shareholders optimally choose auditing quality and the performance sensitivity of managerial pay, taking external corporate governance and auditing regulation into account. For given managerial pay, it is optimal to rely on auditing when external governance is in an intermediate range. When both auditing and incentive pay are used, worse external governance must be balanced by heavier reliance on both of those incentive mechanisms. In designing managerial pay, equity can improve managerial incentives while stock options worsen them.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7104.
Date of creation: Dec 2008
Date of revision:
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Other versions of this item:
- Marco Pagano & Giovanni Immordino, 2009. "Corporate Fraud, Governance and Auditing," EIEF Working Papers Series 0909, Einaudi Institute for Economics and Finance (EIEF), revised Sep 2009.
- Giovanni Immordino & Marco Pagano, 2008. "Corporate Fraud, Governance and Auditing," CSEF Working Papers 203, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 26 Apr 2012.
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
- K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law
- M42 - Business Administration and Business Economics; Marketing; Accounting - - Accounting - - - Auditing
This paper has been announced in the following NEP Reports:
- NEP-ACC-2009-02-28 (Accounting & Auditing)
- NEP-ALL-2009-02-28 (All new papers)
- NEP-CTA-2009-02-28 (Contract Theory & Applications)
- NEP-LAW-2009-02-28 (Law & Economics)
- NEP-REG-2009-02-28 (Regulation)
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