The Economics of Fraudulent Accounting
41 Pages Posted: 25 May 2006 Last revised: 17 Aug 2022
There are 4 versions of this paper
The Economics of Fraudulent Accounting
The Economics of Fraudulent Accounting
The Economics of Fraudulent Accounting
The Economics of Fraudulent Accounting
Date Written: August 2005
Abstract
We argue that earnings management and fraudulent accounting have important economic consequences. In a model where the costs of earnings management are endogenous, we show that in equilibrium, bad managers hire and invest too much in order to pool with the good managers. This behavior distorts the allocation of economic resources among firms. We test the predictions of the model using new historical and firm-level data. First, we show that periods of high stock market valuations are systematically followed by large increases in reported frauds. We then show that during periods of suspicious accounting, firms hire and invest excessively, while insiders exercise options and sell stocks. When the misreporting is detected, firms shed labor and capital and productivity improves. In the aggregate, our model seems able to account for periods of jobless and investment-less growth.
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
The Economics of Fraudulent Accounting
By Simi Kedia and Thomas Philippon
-
The Economics of Fraudulent Accounting
By Simi Kedia and Thomas Philippon
-
The Economics of Fraudulent Accounting
By Semi Kedia and Thomas Philippon
-
By Paul Povel, Rajdeep Singh, ...
-
By Paul Povel, Rajdeep Singh, ...
-
Insider Trading Before Accounting Scandals
By Anup Agrawal and Tommy Cooper
-
Corporate Investments: Learning from Restatements
By Art Durnev and Claudine Mangen