The Puzzling State of Low-Integrity Relations Between Managers and Capital Markets (PDF file of slides)
Michael C. Jensen
Social Science Electronic Publishing (SSEP), Inc.; Harvard Business School; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)
Harvard NOM Working Paper No. 06-04
Barbados Group Working Paper No. 05-05
PDF file of slides for Keynote Speech at the RFS-IU Conference on The Causes and Consequences of Recent Financial Market Bubbles, Aug. 12-13, 2005, Bloomington, IN
Note: SSRN is experimenting with enabling the distribution of different types of files: slides, spreadsheets, video, etc. This is the third upload of a pdf file of Powerpoint slides. We are interested in our users desires to distribute files that go beyond word processing text files. You can communicate with me on these issues via my email address below.
I discuss the growing lack of integrity between managers and capital markets, some of the causes of this situation and its value destroying effects. I define what I mean by integrity (a system or entity which is whole, complete and stable), and the various levels of integrity, and discuss the implications that entities or systems that are out of integrity don't work.
I discuss how it has become part of every top manager's job over recent decades to manage earnings and how it is that anytime a manager makes a decision to manage earnings that is other than what would be required to maximize firm value, he or she has lied. Some are upset by such strong language to describe this phenomenon. But when we refuse to label these lies for what they are we disable the normal social sanctions in management systems and boards of directors that would help limit such activities.
I argue that finance scholars have contributed to this lack of integrity, for example, by failing to recognize that management and board fiduciary responsibility extends beyond current bondholders and stockholders to future bondholders and stockholders as well.
I discuss a few of the studies that indicate both managers and analysts have engaged in less than truthful behavior. While each of the studies when viewed in isolation can be called into question on various grounds, when viewed as a whole they paint a picture that indicates something is not right in this market. It appears managers and analysts are involved in some sort of collusive equilibrium, but I cannot understand how that could be sustained in this market with so many players on both sides. This is the puzzle that requires more attention by researchers in finance and accounting.
Number of Pages in PDF File: 21
Keywords: Integrity, Lies, Lying, Managing Earnings, Smoothing Earnings, Collusion
JEL Classification: G29, G34, M41, M43
Date posted: August 15, 2005