Corporate Fraud, Governance and Auditing
We analyze corporate fraud in a model in which managers have superior information but are biased against liquidation, because of their private benefits from empire building. This may induce them to misreport information and even bribe auditors when liquidation would be value-increasing. To curb fraud, shareholders optimally choose auditing quality and the performance sensitivity of managerial pay, taking external corporate governance and auditing regulation into account. For given managerial pay, it is optimal to rely on auditing when external governance is in an intermediate range. When both auditing and incentive pay are used, worse external governance must be balanced by heavier reliance on both of those incentive mechanisms. In designing managerial pay, equity can improve managerial incentives while stock options worsen them.
|Date of creation:||Dec 2008|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820
|Order Information:|| Email: |
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.:
- Daniel Bergstresser & Thomas Philippon, 2003.
"CEO incentives and earnings management,"
862, Federal Reserve Bank of Chicago.
- Eisfeldt, Andrea L. & Rampini, Adriano A., 2008. "Managerial incentives, capital reallocation, and the business cycle," Journal of Financial Economics, Elsevier, vol. 87(1), pages 177-199, January.
- Ingolf Dittmann & Ernst Maug, 2007. "Lower Salaries and No Options? On the Optimal Structure of Executive Pay," Journal of Finance, American Finance Association, vol. 62(1), pages 303-343, 02.
- Paul Povel & Rajdeep Singh & Andrew Winton, 2007.
"Booms, Busts, and Fraud,"
Review of Financial Studies,
Society for Financial Studies, vol. 20(4), pages 1219-1254.
- 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.
- Lin Peng & Ailsa Röell, 2008. "Executive pay and shareholder litigation," Review of Finance, European Finance Association, vol. 12(1), pages 141-184.
- Marco Pagano & Giovanni Immordino, 2007.
"Optimal Regulation of Auditing,"
CESifo Working Paper Series
1980, CESifo Group Munich.
- Agrawal, Anup & Chadha, Sahiba, 2005. "Corporate Governance and Accounting Scandals," Journal of Law and Economics, University of Chicago Press, vol. 48(2), pages 371-406, October.
- Simi Kedia & Thomas Philippon, 2009.
"The Economics of Fraudulent Accounting,"
Review of Financial Studies,
Society for Financial Studies, vol. 22(6), pages 2169-2199, June.
- Goldman, Eitan & Slezak, Steve L., 2006. "An equilibrium model of incentive contracts in the presence of information manipulation," Journal of Financial Economics, Elsevier, vol. 80(3), pages 603-626, June.
- Kevin J. Murphy & Brian J. Hall, 2000.
"Optimal Exercise Prices for Executive Stock Options,"
American Economic Review,
American Economic Association, vol. 90(2), pages 209-214, May.
- Brian J. Hall & Kevin J. Murphy, 2000. "Optimal Exercise Prices for Executive Stock Options," NBER Working Papers 7548, National Bureau of Economic Research, Inc.
- Tracy Yue Wang & Andrew Winton & Xiaoyun Yu, 2010. "Corporate Fraud and Business Conditions: Evidence from IPOs," Journal of Finance, American Finance Association, vol. 65(6), pages 2255-2292, December.
- Maug, Ernst & Dittmann, Ingolf, 2007. "Lower Salaries and No Options: The Optimal Structure of Executive Pay," Sonderforschungsbereich 504 Publications 07-41, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
- Burns, Natasha & Kedia, Simi, 2006. "The impact of performance-based compensation on misreporting," Journal of Financial Economics, Elsevier, vol. 79(1), pages 35-67, January.
- Steven D. Levitt & Christopher M. Snyder, 1997. "Is No. News Bad News? Information Transmission and the Role of "Early Warning" in the Principal-Agent Model," RAND Journal of Economics, The RAND Corporation, vol. 28(4), pages 641-661, Winter.
When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:7104. 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: ()The email address of this maintainer does not seem to be valid anymore. Please ask to update the entry or send us the correct address
If references are entirely missing, you can add them using this form.