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Smokescreen: How Managers Behave When They Have Something to Hide

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  • Artiga González, Tanja

    ()

  • Schmid, Markus

    ()

  • Yermack, David

    ()

Abstract

We study financial reporting and corporate governance in 216 U.S. companies accused of price fixing by antitrust authorities. We document a range of strategies used by these firms when reporting financial results, including frequent earnings smoothing, segment reclassification, and restatements. In corporate governance, cartel firms favor outside directors who are likely to be inattentive monitors due to their status as foreign or “busy.” When directors resign, they are often not replaced, and new auditors are rarely engaged. Cartel managers exercise their stock options faster than managers of other firms. While our results are based only upon firms engaged in price fixing, we expect that they should apply generally to all companies in which managers seek to conceal poor performance or personal wrongdoing.

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File URL: http://www1.vwa.unisg.ch/RePEc/usg/sfwpfi/WPF-1309.pdf
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Bibliographic Info

Paper provided by University of St. Gallen, School of Finance in its series Working Papers on Finance with number 1309.

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Length: 37 pages
Date of creation: Mar 2013
Date of revision:
Handle: RePEc:usg:sfwpfi:2013:09

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Keywords: Cartels; price fixing; accounting fraud; boards of directors; corporate governance.;

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  1. Augustin Landier & Julien Sauvagnat & David Sraer & David Thesmar, 2013. "Bottom-Up Corporate Governance," Review of Finance, European Finance Association, vol. 17(1), pages 161-201.
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  6. Lang, Mark & Smith Raedy, Jana & Wilson, Wendy, 2006. "Earnings management and cross listing: Are reconciled earnings comparable to US earnings?," Journal of Accounting and Economics, Elsevier, vol. 42(1-2), pages 255-283, October.
  7. Daniel Bergstresser & Thomas Philippon, 2003. "CEO incentives and earnings management," Proceedings 862, Federal Reserve Bank of Chicago.
  8. Spagnolo, Giancarlo, 2005. "Managerial incentives and collusive behavior," European Economic Review, Elsevier, vol. 49(6), pages 1501-1523, August.
  9. Berger, Philip G. & Ofek, Eli, 1995. "Diversification's effect on firm value," Journal of Financial Economics, Elsevier, vol. 37(1), pages 39-65, January.
  10. Simi Kedia & Thomas Philippon, 2005. "The Economics of Fraudulent Accounting," NBER Working Papers 11573, National Bureau of Economic Research, Inc.
  11. Michael J. Cooper & Huseyin Gulen & Alexei V. Ovtchinnikov, 2010. "Corporate Political Contributions and Stock Returns," Journal of Finance, American Finance Association, vol. 65(2), pages 687-724, 04.
  12. Klein, April, 2002. "Audit committee, board of director characteristics, and earnings management," Journal of Accounting and Economics, Elsevier, vol. 33(3), pages 375-400, August.
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