A Simple Theory-Based Approach to Identifying Misreporting Costs and Biases

42 Pages Posted: 16 Apr 2018 Last revised: 14 Oct 2018

See all articles by Jeremy Bertomeu

Jeremy Bertomeu

University of California, San Diego (UCSD) - Rady School of Management

Edwige Cheynel

University of California, San Diego (UCSD) - Rady School of Management

Edward Xuejun Li

City University of New York (CUNY) - Stan Ross Department of Accountancy

Ying Liang

CUNY Baruch College; City University of New York

Date Written: March 30, 2018

Abstract

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

Bertomeu, Jeremy and Cheynel, Edwige and Li, Edward Xuejun and Liang, Ying, A Simple Theory-Based Approach to Identifying Misreporting Costs and Biases (March 30, 2018). Baruch College Zicklin School of Business Research Paper No. 2018-04-02. Available at SSRN: https://ssrn.com/abstract=3153047 or http://dx.doi.org/10.2139/ssrn.3153047

Jeremy Bertomeu (Contact Author)

University of California, San Diego (UCSD) - Rady School of Management ( email )

9500 Gilman Drive
Rady School of Management
La Jolla, CA 92093
United States

Edwige Cheynel

University of California, San Diego (UCSD) - Rady School of Management ( email )

Edward Xuejun Li

City University of New York (CUNY) - Stan Ross Department of Accountancy ( email )

One Bernard Baruch Way, Box B12-225
New York, NY 10010
United States
646-312-3235 (Phone)

Ying Liang

CUNY Baruch College ( email )

17 Lexington Avenue
New York, NY 10021
United States

City University of New York ( email )

695 Park Avenue
New York, NY 10021
United States

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