Time-Inconsistent Management & the Sarbanes-Oxley Act
Manuel A. Utset
Florida State University College of Law
Ohio Northern University Law Review, Forthcoming
FSU College of Law, Law and Economics Paper No. 07-28
FSU College of Law, Public Law Research Paper No. 239
U of Utah Legal Studies Paper No. 05-20
This paper argues that the observed misconduct of managers and gatekeepers in the recent corporate scandals is better explained if one accounts for the time-inconsistent preferences of corporate actors. It builds on of my model of time-inconsistent misconduct, which I develop more fully elsewhere. A person engages in time-inconsistent misconduct when she has a long-term preference to act properly (because the expected costs of misconduct exceed expected rewards), but overrides that baseline preference (one or more times) by yielding to short-term preferences to grab immediate rewards and delay immediate costs. I discuss two types of time-inconsistent misconduct: (1) nibbling opportunism - repeatedly grabbing immediate opportunistic rewards (i.e. over-consuming opportunism); and (2) procrastination following through with planned actions - e.g. delay by board members in monitoring and disciplining managers. To properly deter time-inconsistent misconduct it is necessary to directly target the short-term preferences that motivate it. The paper develops a number of positive and normative implications within the context of the Sarbanes-Oxley Act.
Number of Pages in PDF File: 30
Keywords: corporate governance, securities, behavioral law & economics, hyperbolic discounting, time-inconsistent preferences
JEL Classification: G34, K22, D90, K42, D61, M14Accepted Paper Series
Date posted: September 13, 2005 ; Last revised: October 13, 2008
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