Benford and the Internal Capital Market: A Useful Indicator of Managerial Engagement
German Economic Review 19(3): 309–329; doi: 10.1111/geer.12129
Posted: 30 Jan 2017 Last revised: 28 Jun 2019
Date Written: November 1, 2016
We propose the application of digit analysis using the Benford law to indicate managerial engagement in the capital allocation process. First, we motivate the potential of the Benford digit analysis to identify allocation outcomes that are shaped by human engagement instead of fixed decision rules. Second, we provide a case study to illustrate how the Benford digit analysis can be used to detect allocations affected by managerial interventions. We are unaware of any study applying the Benford test to internal capital markets, while this approach appears very useful in this context. It is commonly used in the auditing, financial accounting, and fraud detection literature.
Keywords: Internal capital allocation, the Benford law, managerial engagement
JEL Classification: C16, G21, G31
Suggested Citation: Suggested Citation