The Economics of Fraudulent Accounting

Posted: 1 Jun 2009

See all articles by Simi Kedia

Simi Kedia

Rutgers Business School

Thomas Philippon

New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER)

Multiple version iconThere are 4 versions of this paper

Date Written: June 2009

Abstract

We argue that earnings management and fraudulent accounting have important economic consequences. In a model where the costs of earnings management are endogenous, we show that in equilibrium, low-productivity firms hire and invest too much in order to pool with high productivity firms. This behavior distorts the allocation of economic resources in the economy. We test the predictions of the model using firm-level data. We show that during periods of suspicious accounting, firms hire and invest excessively, while managers exercise options. When the misreporting is detected, firms shed labor and capital and productivity improves. Our firm-level results hold both before and after the market crash of 2000. In the aggregate, our model provides a novel explanation for periods of jobless and investment-less growth.

Keywords: G30, G34, M41

Suggested Citation

Kedia, Simi and Philippon, Thomas, The Economics of Fraudulent Accounting (June 2009). The Review of Financial Studies, Vol. 22, Issue 6, pp. 2169-2199, 2009. Available at SSRN: https://ssrn.com/abstract=1408425 or http://dx.doi.org/hhm016

Simi Kedia (Contact Author)

Rutgers Business School ( email )

117 Levin
94 Rockafellar Road
Piscataway, NJ
United States
8484454195 (Phone)

Thomas Philippon

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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