How Common Are Intentional GAAP Violations? Estimates from a Dynamic Model

66 Pages Posted: 31 Mar 2013 Last revised: 8 Dec 2016

Anastasia A. Zakolyukina

University of Chicago - Booth School of Business

Date Written: December 8, 2016

Abstract

This paper estimates the extent of undetected misstatements that violate GAAP using data on detected misstatements — earnings restatements — and a dynamic model. The model features a CEO who can manipulate his firm’s stock price by misstating earnings. I find that the CEO’s expected cost of misleading investors is low. The probability of detection over a five-year horizon is 13.91%, and the average misstatement, if detected, results in a 8.53% loss in the CEO’s wealth. The low expected cost implies a high fraction of CEOs who misstate earnings at least once at 60%, inflation in stock prices across CEOs who misstate earnings at 2.02%, and inflation in stock prices across all CEOs at 0.77%. Wealthier CEOs with higher equity holdings or higher cash wealth manipulate less and the average misstatement is larger in smaller firms.

Keywords: Earnings manipulation, Executive compensation, Earnings restatements

JEL Classification: M41, G34, G38, K22, K42

Suggested Citation

Zakolyukina, Anastasia A., How Common Are Intentional GAAP Violations? Estimates from a Dynamic Model (December 8, 2016). Chicago Booth Research Paper No. 13-45. Available at SSRN: https://ssrn.com/abstract=2242251 or http://dx.doi.org/10.2139/ssrn.2242251

Anastasia A. Zakolyukina (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773.834.4838 (Phone)
773.926.0941 (Fax)

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