Corporate Fraud, Governance and Auditing
We analyze corporate fraud in a model where managers have superior information but, due to private benefits from empire building, are biased against liquidation. This may induce them to misreport information and even bribe auditors when liquidation would be value-increasing. To restrain fraud, shareholders optimally choose auditing quality and the performance sensitivity of managerial pay, taking into account external corporate governance and auditing regulation. For given managerial pay, it is optimal to rely on auditing when external governance is in an intermediate range. When both auditing and managerial incentive pay are used, worse external governance must be balanced by heavier reliance on both of these incentive mechanisms. In designing managerial pay, equity can improve managerial incentives while options worsen them.
|Date of creation:||01 Sep 2008|
|Date of revision:||26 Apr 2012|
|Publication status:||Published in the Review of Corporate Finance Studies, 2012, 1(1), pp. 109-133.|
|Contact details of provider:|| Postal: I-80126 Napoli|
Phone: +39 081 - 675372
Fax: +39 081 - 675372
Web page: http://www.csef.it/
More information through EDIRC
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.:
- 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.
- 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.
- Giovanni Immordino & Marco Pagano, 2005.
"Optimal Regulation of Auditing,"
CSEF Working Papers
133, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 01 May 2007.
- 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.
- 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.
- 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.
- 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.
- Bergstresser, Daniel & Philippon, Thomas, 2006.
"CEO incentives and earnings management,"
Journal of Financial Economics,
Elsevier, vol. 80(3), pages 511-529, 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
[Lower salaries and no options? On the optimal structure of executive pay]," Papers 07-41, Sonderforschungsbreich 504.
- 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.
- 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.
- 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.
- Lin Peng & Ailsa Röell, 2008. "Executive pay and shareholder litigation," Review of Finance, European Finance Association, vol. 12(1), pages 141-184.
- 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.
When requesting a correction, please mention this item's handle: RePEc:sef:csefwp:203. 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: (Lia Ambrosio)
If references are entirely missing, you can add them using this form.