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The economics of fraudulent accounting

Author: Simi Kedia; Thomas Philippon; National Bureau of Economic Research.
Publisher: Cambridge, Mass. : National Bureau of Economic Research, 2005.
Series: Working paper series (National Bureau of Economic Research), working paper no. 11573.
Edition/Format:   Print book : EnglishView all editions and formats
Database:WorldCat
Summary:
"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  Read more...
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Material Type: Internet resource
Document Type: Book, Internet Resource
All Authors / Contributors: Simi Kedia; Thomas Philippon; National Bureau of Economic Research.
OCLC Number: 61522308
Notes: "August 2005."
Description: 26, [11] pages : illustrations ; 22 cm.
Series Title: Working paper series (National Bureau of Economic Research), working paper no. 11573.
Responsibility: Simi Kedia, Thomas Philippon.

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"--National Bureau of Economic Research web site.

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