The Economics of Fraudulent Accounting
AbstractWe argue that earnings management and fraudulent accounting have important economic consequences. In a model where the costs of earnings management are endogenous, we show that in equilibrium, bad managers hire and invest too much in order to pool with the good managers. This behavior distorts the allocation of economic resources among firms. We test the predictions of the model using new historical and firm-level data. First, we show that periods of high stock market valuations are systematically followed by large increases in reported frauds. We then show that during periods of suspicious accounting, firms hire and invest excessively, while insiders exercise options and sell stocks. When the misreporting is detected, firms shed labor and capital and productivity improves. In the aggregate, our model seems able to account for periods of jobless and investment-less growth.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11573.
Date of creation: Aug 2005
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Other versions of this item:
- E0 - Macroeconomics and Monetary Economics - - General
- G3 - Financial Economics - - Corporate Finance and Governance
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-09-11 (All new papers)
- NEP-FIN-2005-09-11 (Finance)
- NEP-MAC-2005-09-11 (Macroeconomics)
- NEP-REG-2005-09-11 (Regulation)
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.:
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8449, National Bureau of Economic Research, Inc.
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- repec:fip:fedhpr:y:2003:i:may:p:304-335 is not listed on IDEAS
- Ilan Guttman & Ohad Kadan & Eugene Kandel, 2003. "Adding the Noise: A Theory of Compensation-Driven Earnings Management," Discussion Paper Series dp355, The Center for the Study of Rationality, Hebrew University, Jerusalem.
- Dechow, Patricia M. & Kothari, S. P. & L. Watts, Ross, 1998. "The relation between earnings and cash flows," Journal of Accounting and Economics, Elsevier, vol. 25(2), pages 133-168, May.
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