Why Do Some Senior Managers Inflate Firms’ Reported Earnings? Economic Causes and Potential Solutions
Kostyuk. A. Why Do Some Senior Managers Inflate Firms’ Reported Earnings? Economic Causes And Potential Solutions / V.G. Sridharan, F. Navissi, A. Kostyuk // Corporate Ownership and Control. Volume 5, Issue 1, Fall 2007, continued 3. P. 415-432.
Posted: 23 Dec 2014
Date Written: September 23, 2007
We examine the economic reasons underlying the behavior of some senior managers to inflate their firms’ reported earnings. While the extant literature cites accounting and corporate governance structure as potential reasons that facilitate the inflating tendency, we conjecture that opportunism at different hierarchical levels within firms do not leave much scope for some senior managers to improve firms’ fundamental performance. To protect their personal utility, they resort to inflating tendency, but only if the firms’ corporate governance has loopholes. A major solution offered here is to improve firms’ internal management control system which could reduce within-firm opportunism. However, this solution must accompany improvements to corporate governance.
Keywords: earnings, managers, corporate governance
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