Financial Manipulation: Words Don't Lie

Abstract

Reliable financial reporting is critical to the efficiency of capital markets. Despite its importance, managers may have incentive to misrepresent financial results for personal gain.

While academics and professionals have developed models to detect aggressive accounting, these have been met with limited success. Still, there is some evidence that quantitative models may be improved through the application of techniques developed by linguists and psychologists to identify deceptive language and behavior.

Why don’t shareholders and analysts apply these techniques to evaluate the truthfulness of management?

Reference: Detecting Deceptive Discussions in Conference Calls (working paper on SSRN), available at: http://ssrn.com/abstract=1572705.

Topics, Issues and Controversies in Corporate Governance and Leadership: The Closer Look series is a collection of short case studies through which we explore topics, issues, and controversies in corporate governance. In each study, we take a targeted look at a specific issue that is relevant to the current debate on governance and explain why it is so important. Larcker and Tayan are co-authors of the book Corporate Governance Matters, and A Real Look at Real World Corporate Governance.

Keywords: transparency, disclosure, accounting restatements, corporate governance

JEL Classification: G30, G34