Competing for Capital: Auditing and Credibility in Financial Reporting

39 Pages Posted: 27 Mar 2017 Last revised: 3 Apr 2017

See all articles by Raphael Boleslavsky

Raphael Boleslavsky

University of Miami - School of Business Administration - Department of Economics

Bruce I. Carlin

University of California, Los Angeles (UCLA) - Anderson School of Management

Christopher Cotton

Queen's University, Department of Economics

Date Written: March 2017

Abstract

When self-interested agents compete for scarce resources, they often exaggerate the promise of their activities. As such, principals must consider both the quality of each opportunity and each agent’s credibility. We show that principals are better off with less transparency because they gain access to better investments. This is due to a complementarity between the agents’ effort provision and their ability to exaggerate. As such, it is suboptimal for principals toprevent misreporting, even if doing so is costless. This helps explain why exaggeration is ubiquitous during allocation decisions: money management, analyst coverage, private equity fundraising, and venture capital investments.

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Suggested Citation

Boleslavsky, Raphael and Carlin, Bruce I. and Cotton, Christopher, Competing for Capital: Auditing and Credibility in Financial Reporting (March 2017). NBER Working Paper No. w23273. Available at SSRN: https://ssrn.com/abstract=2941251

Raphael Boleslavsky (Contact Author)

University of Miami - School of Business Administration - Department of Economics ( email )

P.O. Box 248126
Coral Gables, FL 33124-6550
United States

Bruce I. Carlin

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

Christopher Cotton

Queen's University, Department of Economics ( email )

Dunning Hall 230
Kingston, Ontario K7L 3N6
Canada

HOME PAGE: http://https://sites.google.com/site/cscotton

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