45 Pages Posted: 7 Dec 2002 Last revised: 8 May 2009
Date Written: 2002
This paper develops a model of the causes and consequences of misreporting of corporate performance. Misreporting in our model covers all actions, whether legal or illegal, that enable managers of firms with low value to make statements that mimic those made by firms with high value. We show that even managers who cannot sell their shares in the short-term might misreport in order to improve the terms under which their company would be able to raise capital for new projects or acquisitions. When managers may sell some of their holdings in the short-term, incentives to misreport and the incidence of misreporting increase to an extent that depends on what fraction of their holdings managers may sell and on whether they can sell without the market knowing about it. Investments in misreporting have real economic costs and distort financing and investment decisions, with firms that misreport raising too much equity and firms that do not misreport raising too little. A lax accounting and legal environment increases the incidence of misreporting and consequently the distortions in capital allocation. Our analysis provides many testable predictions concerning the times, industries, and types of firms where misreporting is likely to occur. The analysis also has implications for corporate governance and executive compensation.
Keywords: Asymmetric information, acquisitions, corporate governance, disclosure, myopia, short-termism, executive compensation, stock options, insider trading, accounting, financial statements, earnings management, auditor, financial reporting
JEL Classification: D82, G34, J33, K22, M41, M43, M45, M49
Suggested Citation: Suggested Citation
Bar-Gill, Oren and Bebchuk, Lucian A., Misreporting Corporate Performance (2002). Harvard Law and Economics Discussion Paper No. 400. Available at SSRN: https://ssrn.com/abstract=354141 or http://dx.doi.org/10.2139/ssrn.354141
By Kevin Murphy