European Business Schools Librarian's Group
ESSEC Working Papers,
ESSEC Research Center, ESSEC Business School
No DR 04008: The Information Limit to Honest Managerial Behavior
Damien Besancenot () and Radu Vranceanu ()
Additional contact information
Damien Besancenot: University of Paris 2, Postal: 92, rue d'Assas, 75007 Paris, FRANCE
Radu Vranceanu: ESSEC Business School, Postal: Avenue Bernard Hirsch - B.P. 50105, 95021 CERGY-PONTOISE CEDEX , FRANCE,
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
27 pages, September 2004
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