European Business Schools Librarian's Group

ESSEC Working Papers,
ESSEC Research Center, ESSEC Business School

No DR 05005: Socially Efficient Managerial Dishonesty

Damien Besancenot () and Radu Vranceanu ()
Additional contact information
Damien Besancenot: University of Paris 2 and LEM (Laboratoire d'économie mathématique), Postal: 92 rue d'Assas, 75006 PARIS, FRANCE
Radu Vranceanu: ESSEC Business School, Postal: Avenue Bernard Hirsch - B.P. 50105, 95021 CERGY-PONTOISE Cedex , FRANCE

Abstract: As a reaction to the corporate scandals of the early 2000s, the US Administration dramatically tightened sanctions against managers who disclose misleading financial information. This paper argues that such a reform might come with some unpleasant macroeconomic effects. The model is cast as a game between the manager of a publicly listed company and the supplier of an essential input, under asymmetric information about the type of the firm. The analysis focuses on the Hybrid Bayesian Equilibrium where at least some managers choose to communicate a false information about the true type of the firm. We show that by dissuading "virtuous lies", whereby a manager strives to win time for a financially distressed company, a tougher sanction brings about a higher frequency of default.

Keywords: Financial distress; Disclosure; Honesty; Corporate regulation; Hybrid Bayesian Equilibrium

JEL-codes: D82; G33; G38

24 pages, May 2005

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