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Socially Efficient Managerial Dishonesty

As a reaction to the corporate scandals of the early 2000s, the US Administration dramatically tightened sanctions against managers who disclose misleading financial information. This paper argues that such a reform might come with some unpleasant macroeconomic effects. The model is cast as a game between the manager of a publicly listed company and the supplier of an essential input, under asymmetric information about the type of the firm. The analysis focuses on the Hybrid Bayesian Equilibrium where at least some managers choose to communicate a false information about the true type of the firm. We show that by dissuading "virtuous lies", whereby a manager strives to win time for a financially distressed company, a tougher sanction brings about a higher frequency of default.

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Paper provided by ESSEC Research Center, ESSEC Business School in its series ESSEC Working Papers with number DR 05005.

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Length: 24 pages
Date of creation: May 2005
Date of revision:
Handle: RePEc:ebg:essewp:dr-05005
Contact details of provider: Postal: ESSEC Research Center, BP 105, 95021 Cergy, France
Web page: http://www.essec.edu/
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  1. Baruch Lev, 2003. "Corporate Earnings: Facts and Fiction," Journal of Economic Perspectives, American Economic Association, vol. 17(2), pages 27-50, Spring.
  2. Altman, Edward I, 1984. " A Further Empirical Investigation of the Bankruptcy Cost Question," Journal of Finance, American Finance Association, vol. 39(4), pages 1067-89, September.
  3. Murphy, Kevin J., 1999. "Executive compensation," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 38, pages 2485-2563 Elsevier.
  4. 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.
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