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

See all articles by Florian El Mouaaouy

Florian El Mouaaouy

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management)

Jan Riepe

University of Tuebingen - Department of Banking

Date Written: November 1, 2016

Abstract

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

El Mouaaouy, Florian and Riepe, Jan, Benford and the Internal Capital Market: A Useful Indicator of Managerial Engagement (November 1, 2016). German Economic Review 19(3): 309–329; doi: 10.1111/geer.12129, Available at SSRN: https://ssrn.com/abstract=2908063

Florian El Mouaaouy

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management) ( email )

Schackstraße 4
Munich, 80539
Germany

Jan Riepe (Contact Author)

University of Tuebingen - Department of Banking ( email )

Nauklerstr. 47
72074 Tuebingen, Baden Wuerttemberg 72074
Germany

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