66 Pages Posted: 31 Mar 2013 Last revised: 8 Dec 2016
Date Written: December 8, 2016
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: 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