ESSEC Working Papers
No DR 04008:
The Information Limit to Honest Managerial Behavior
Damien Besancenot ()
and Radu Vranceanu ()
Abstract: In the last years of the Internet bubble, many managers
provided fraudulent financial statements with the aim at inflating the
market value of their firms. Is this shortage of honesty an accident or a
buit-in feature of shareholder capitalism? This paper argues that in an
economy hosting publicly traded companies where investors have only
imperfect information about a firm’s type and where a honest financial
report may be wrong, at least some bad firms managers will provide false
statements. Furthermore, in equilibrium some good firm managers may also
resort to corrupt auditors which will issue a favorable report without
carrying out any investigation. The frequency of dishonest managers is
analysed in keeping with the precision of the report and the total number
of firms.
Keywords: Corporate fraud; Accounting information; Manager behavior; Honesty; Perfect Bayesian Equilibrium; (follow links to similar papers)
JEL-Codes: D84; G30; M41; Z13; (follow links to similar papers)
27 pages, September 2004
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