A Simple Theory-Based Approach to Identifying Misreporting Costs and Biases
42 Pages Posted: 16 Apr 2018 Last revised: 14 Oct 2018
Date Written: March 30, 2018
We derive a simple structural estimator of misreporting costs and biases from the models of Dye (1988), Stein (1989) and Einhorn and Ziv (2012), incorporating crosssectional properties of earnings and prices. Identification requires partial knowledge over the distribution of true earnings and non-linearities in the relationship between earnings and prices. As an application, we estimate misreporting costs and, further, validate the model by examining changes in implied manipulation after the Sarbanes-Oxley Act. We characterize the variation in misreporting costs and biases across industries, subsamples of firm size and growth as well as over time and propose an identification strategy that relies on exogenous shocks to misreporting costs. In principle, our approach can be applied to a broad range of models with costly misreporting.
Keywords: costly misreporting; cross-sectional; earnings; reporting; signaling.
JEL Classification: D83;G14;M4
Suggested Citation: Suggested Citation