Advanced Search
MyIDEAS: Login

Corporate Governance, Reputation Concerns, and Herd Behavior

Contents:

Author Info

  • Barbara Schöndube-Pirchegger

    ()
    (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg)

Registered author(s):

    Abstract

    This paper offers an explanation for audit committee failures within a corporate governance context. We consider a setting in which the management of a firm sets up financial statements that are possibly biased. These statements are reviewed/audited by an external auditor and by an audit committee. Both agents report the result of their audit, the auditor acting first. The auditor and the audit committee use an imperfect auditing technology. As a result of their work they privately observe a signal regarding the quality of the financial statements. The probability for a correct signal in the sense that an unbiased report is labelled correct and a biased one incorrect, depends on the type of the agent. Good as well as bad agents exist in the economy. Importantly, two good agents observe identical informative signals while the signal observed by a bad agent is uninformative and uncorrelated to those of other good or bad agents. The audit committee as well as the auditor are anxious to build up reputation regarding their ability in the labor market. Given this predominate goal they report on the signal in order to maximize the market’s assessment of their ability. At the end of the game the true character of the financial statements is publicly learned and the market uses this information along with the agents’ reports to update beliefs about the agents’ type. We show that herding equilibria exist in which the auditor reports based on his signal but the audit committee .herds. and follows the auditor’s judgement no matter what its own insights suggest.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://www.ww.uni-magdeburg.de/fwwdeka/femm/a2007_Dateien/2007_06.pdf
    File Function: First version, 2007
    Download Restriction: no

    Bibliographic Info

    Paper provided by Otto-von-Guericke University Magdeburg, Faculty of Economics and Management in its series FEMM Working Papers with number 07006.

    as in new window
    Length: 23 pages
    Date of creation: Feb 2007
    Date of revision:
    Handle: RePEc:mag:wpaper:07006

    Contact details of provider:
    Postal: Universitätsplatz 2, Gebäude W und I, 39106 Magdeburg
    Phone: (0391) 67-18 584
    Fax: (0391) 67-12 120
    Web page: http://www.ww.uni-magdeburg.de
    More information through EDIRC

    Related research

    Keywords: corporate governance; audit committee; game theory; herding;

    This paper has been announced in the following NEP Reports:

    References

    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.:
    as in new window
    1. Mark L. Defond & Rebecca N. Hann & Xuesong Hu, 2005. "Does the Market Value Financial Expertise on Audit Committees of Boards of Directors?," Journal of Accounting Research, Wiley Blackwell, vol. 43(2), pages 153-193, 05.
    2. Arya, Anil & Mittendorf, Brian, 2005. "Using disclosure to influence herd behavior and alter competition," Journal of Accounting and Economics, Elsevier, vol. 40(1-3), pages 231-246, December.
    3. Benjamin E. Hermalin & Michael S. Weisbach, 1996. "Endogenously Chosen Boards of Directors and Their Monitoring of the CEO," Working Papers _004, University of California at Berkeley, Haas School of Business.
    4. Lucian Arye Bebchuk & Jesse M. Fried, 2003. "Executive Compensation as an Agency Problem," NBER Working Papers 9813, National Bureau of Economic Research, Inc.
    5. Bebchuk, Lucian A. & Fried, Jesse M., 2003. "Executive Compensation as an Agency Problem," Berkeley Olin Program in Law & Economics, Working Paper Series qt81q3136r, Berkeley Olin Program in Law & Economics.
    6. Revsine, Lawrence, 2002. "Enron: sad but inevitable," Journal of Accounting and Public Policy, Elsevier, vol. 21(2), pages 137-145.
    7. Scharfstein, David S & Stein, Jeremy C, 1990. "Herd Behavior and Investment," American Economic Review, American Economic Association, vol. 80(3), pages 465-79, June.
    8. Ozerturk, Saltuk, 2005. "Board independence and CEO pay," Economics Letters, Elsevier, vol. 88(2), pages 260-265, August.
    9. Benston, George J. & Hartgraves, Al L., 2002. "Enron: what happened and what we can learn from it," Journal of Accounting and Public Policy, Elsevier, vol. 21(2), pages 105-127.
    10. Welch, Ivo, 2000. "Herding among security analysts," Journal of Financial Economics, Elsevier, vol. 58(3), pages 369-396, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:mag:wpaper:07006. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Guido Henkel).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.