The Information Limit to Honest Managerial Behavior
In the last years of the Internet bubble, many managers provided fraudulent financial statements with the aim at inflating the market value of their firms. Is this shortage of honesty an accident or a buit-in feature of shareholder capitalism? This paper argues that in an economy hosting publicly traded companies where investors have only imperfect information about a firm’s type and where a honest financial report may be wrong, at least some bad firms managers will provide false statements. Furthermore, in equilibrium some good firm managers may also resort to corrupt auditors which will issue a favorable report without carrying out any investigation. The frequency of dishonest managers is analysed in keeping with the precision of the report and the total number of firms.
|Date of creation:||Sep 2004|
|Date of revision:|
|Contact details of provider:|| Postal: ESSEC Research Center, BP 105, 95021 Cergy, France|
Web page: http://www.essec.edu/
More information through EDIRC
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.:
- Noreen, Eric, 1988. "The economics of ethics: A new perspective on agency theory," Accounting, Organizations and Society, Elsevier, vol. 13(4), pages 359-369, June.
- Diamond, Douglas W & Verrecchia, Robert E, 1991. " Disclosure, Liquidity, and the Cost of Capital," Journal of Finance, American Finance Association, vol. 46(4), pages 1325-59, September.
- Paul M. Healy & Krishna G. Palepu, 2003. "The Fall of Enron," Journal of Economic Perspectives, American Economic Association, vol. 17(2), pages 3-26, Spring.
- Jack Hirshleifer, 1977. "Economics from a Biological Viewpoint," UCLA Economics Working Papers 087, UCLA Department of Economics.
- Brickley, James A. & Smith Jr., Clifford W. & Zimmerman, Jerold L., 2002. "Business ethics and organizational architecture," Journal of Banking & Finance, Elsevier, vol. 26(9), pages 1821-1835, September.
- Joel S. Demski, 2003. "Corporate Conflicts of Interest," Journal of Economic Perspectives, American Economic Association, vol. 17(2), pages 51-72, Spring.
- Besancenot, Damien & Vranceanu, Radu, 2002. "Manager honesty and foreign investment in developing countries," Research in Economics, Elsevier, vol. 56(3), pages 231-250, September.
- Paolo Mauro, 1995. "Corruption and Growth," The Quarterly Journal of Economics, Oxford University Press, vol. 110(3), pages 681-712.
- Baruch Lev, 2003. "Corporate Earnings: Facts and Fiction," Journal of Economic Perspectives, American Economic Association, vol. 17(2), pages 27-50, Spring.
When requesting a correction, please mention this item's handle: RePEc:ebg:essewp:dr-04008. 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: (Sophie Magnanou)
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.