Socially Efficient Managerial Dishonesty
AbstractAs a reaction to the corporate scandals of the early 2000s, the US Administration dramatically tightened sanctions against managers who disclose misleading financial information. This paper argues that such a reform might come with some unpleasant macroeconomic effects. The model is cast as a game between the manager of a publicly listed company and the supplier of an essential input, under asymmetric information about the type of the firm. The analysis focuses on the Hybrid Bayesian Equilibrium where at least some managers choose to communicate a false information about the true type of the firm. We show that by dissuading "virtuous lies", whereby a manager strives to win time for a financially distressed company, a tougher sanction brings about a higher frequency of default.
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Bibliographic InfoPaper provided by ESSEC Research Center, ESSEC Business School in its series ESSEC Working Papers with number DR 05005.
Length: 24 pages
Date of creation: May 2005
Date of revision:
Financial distress; Disclosure; Honesty; Corporate regulation; Hybrid Bayesian Equilibrium;
Find related papers by JEL classification:
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
- G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-05-14 (All new papers)
- NEP-BEC-2005-05-14 (Business Economics)
- NEP-FIN-2005-05-14 (Finance)
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