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The Information Limit to Honest Managerial Behavior

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Author Info
Besancenot, Damien () (University of Paris 2)
Vranceanu, Radu () (ESSEC Business School)

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Abstract

In the last years of the Internet bubble, many managers provided fraudulent financial statements with the aim at inflating the market value of their firms. Is this shortage of honesty an accident or a buit-in feature of shareholder capitalism? This paper argues that in an economy hosting publicly traded companies where investors have only imperfect information about a firm’s type and where a honest financial report may be wrong, at least some bad firms managers will provide false statements. Furthermore, in equilibrium some good firm managers may also resort to corrupt auditors which will issue a favorable report without carrying out any investigation. The frequency of dishonest managers is analysed in keeping with the precision of the report and the total number of firms.

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File URL: http://www.essec.fr/faculty/showDeclFileRes.do?declId=5540&key=__workpaper__
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Publisher Info
Paper provided by ESSEC Research Center, ESSEC Business School in its series ESSEC Working Papers with number DR 04008.

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Length: 27 pages
Date of creation: Sep 2004
Date of revision:
Handle: RePEc:ebg:essewp:dr-04008

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Postal: ESSEC Research Center, BP 105, 95021 Cergy, France
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Web page: http://www.essec.edu/
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Related research
Keywords: Corporate fraud; Accounting information; Manager behavior; Honesty; Perfect Bayesian Equilibrium;

Other versions of this item:

Find related papers by JEL classification:
D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
G30 - Financial Economics - - Corporate Finance and Governance - - - General
M41 - Business Administration and Business Economics; Marketing; Accounting - - Accounting - - - Accounting
Z13 - Other Special Topics - - Cultural Economics - - - Social Norms and Social Capital; Social Networks Economic Anthropology

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Mauro, Paolo, 1995. "Corruption and Growth," The Quarterly Journal of Economics, MIT Press, vol. 110(3), pages 681-712, August. [Downloadable!] (restricted)
  2. Baruch Lev, 2003. "Corporate Earnings: Facts and Fiction," Journal of Economic Perspectives, American Economic Association, vol. 17(2), pages 27-50, Spring. [Downloadable!] (restricted)
  3. Noreen, Eric, 1988. "The economics of ethics: A new perspective on agency theory," Accounting, Organizations and Society, Elsevier, vol. 13(4), pages 359-369, June. [Downloadable!] (restricted)
  4. Brickley, James A. & Smith Jr., Clifford W. & Zimmerman, Jerold L., 2002. "Business ethics and organizational architecture," Journal of Banking & Finance, Elsevier, vol. 26(9), pages 1821-1835, September. [Downloadable!] (restricted)
  5. Jack Hirshleifer, 1977. "Economics from a Biological Viewpoint," UCLA Economics Working Papers 087, UCLA Department of Economics. [Downloadable!]
  6. Diamond, Douglas W & Verrecchia, Robert E, 1991. " Disclosure, Liquidity, and the Cost of Capital," Journal of Finance, American Finance Association, vol. 46(4), pages 1325-59, September. [Downloadable!] (restricted)
  7. Joel S. Demski, 2003. "Corporate Conflicts of Interest," Journal of Economic Perspectives, American Economic Association, vol. 17(2), pages 51-72, Spring. [Downloadable!] (restricted)
  8. Paul M. Healy & Krishna G. Palepu, 2003. "The Fall of Enron," Journal of Economic Perspectives, American Economic Association, vol. 17(2), pages 3-26, Spring. [Downloadable!] (restricted)
  9. Besancenot, Damien & Vranceanu, Radu, 2002. "Manager honesty and foreign investment in developing countries," Research in Economics, Elsevier, vol. 56(3), pages 231-250, September. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Besancenot, Damien & Vranceanu, Radu, 2005. "Socially Efficient Managerial Dishonesty," ESSEC Working Papers DR 05005, ESSEC Research Center, ESSEC Business School. [Downloadable!]
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