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Corporate Fraud, Governance and Auditing

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  • Immordino, Giovanni
  • Pagano, Marco

Abstract

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.

Suggested Citation

  • Immordino, Giovanni & Pagano, Marco, 2008. "Corporate Fraud, Governance and Auditing," CEPR Discussion Papers 7104, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:7104
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    References listed on IDEAS

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    Cited by:

    1. Maurizio Iacopetta & Raoul Minetti & Pietro F. Peretto, 2014. "Financial markets industry dynamics and growth," Sciences Po publications info:hdl:2441/1ani1qs24g9, Sciences Po.
    2. Marco Pagano & Giovanni Immordino, 2007. "Optimal Regulation of Auditing," CESifo Economic Studies, CESifo, vol. 53(3), pages 363-388, September.
    3. repec:oup:rcorpf:v:4:y:2015:i:1:p:108-154. is not listed on IDEAS

    More about this item

    Keywords

    accounting fraud; auditing; corporate governance; managerial compensation; regulation;

    JEL classification:

    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law
    • M42 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Auditing

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