Inducing Reliable Reporting

Cornell University

50 Pages Posted: 19 Jan 2001

See all articles by Robert J. Bloomfield

Robert J. Bloomfield

Cornell University - Samuel Curtis Johnson Graduate School of Management

Jeffrey Hales

University of Texas at Austin - Department of Accounting

Date Written: November 29, 2000

Abstract

SEC Chairman Arthur Levitt recently called on investors to discourage firms' earnings management by expecting reliable reporting and punishing deceptive reporters (Levitt 1998a, 1999). This paper presents a game-theoretic model in which such punishments can induce managers to develop reputations for reliable reporting. Our first experiment confirms that investors can induce managers to report reliably when one investor visibly commits to a strategy of expecting reliable reporting and punishing reporters who fail to meet that expectation. However, our second experiment shows that reliable reporting is much more difficult to sustain without such a visibly committed investor. These results suggest that managers and investors may have difficulty avoiding the pareto-dominated equilibrium in which managers exploit all of the discretion permitted by GAAP.

JEL Classification: C70, G10, M41, M43, C92

Suggested Citation

Bloomfield, Robert J. and Hales, Jeffrey, Inducing Reliable Reporting (November 29, 2000). Cornell University, Available at SSRN: https://ssrn.com/abstract=252189 or http://dx.doi.org/10.2139/ssrn.252189

Robert J. Bloomfield (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

450 Sage Hall
Ithaca, NY 14853
United States
607-255-9407 (Phone)
607-254-4590 (Fax)

Jeffrey Hales

University of Texas at Austin - Department of Accounting ( email )

Austin, TX 78712
United States
512-471-2163 (Phone)
512-471-3907 (Fax)

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
417
Abstract Views
2,937
rank
75,745
PlumX Metrics