Time-Inconsistent Management & the Sarbanes-Oxley Act

Abstract:     
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, M14

Accepted Paper Series