Competing for Capital: Auditing and Credibility in Financial Reporting

Raphael Boleslavsky, Bruce Carlin and Christopher Cotton

No 274703, Queen's Economics Department Working Papers from Queen's University - Department of Economics

Abstract: When self-interested agents compete for scarce resources, they often exaggerate the promise of their activities. As such, principals must consider both the quality of each opportunity and each agent’s credibility. We show that principals are better off with less transparency because they gain access to better investments. This is due to a complementarity between the agents’ effort provision and their ability to exaggerate. As such, it is suboptimal for principals to prevent misreporting, even if doing so is costless. This helps explain why exaggeration is ubiquitous during allocation decisions: money management, analyst coverage, private equity fundraising, and venture capital investments.

Keywords: Demand and Price Analysis; Financial Economics (search for similar items in EconPapers)
Pages: 39
Date: 2017-01
New Economics Papers: this item is included in nep-acc
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https://ageconsearch.umn.edu/record/274703/files/qed_wp_1377.pdf (application/pdf)

Related works:
Working Paper: Competing for Capital: Auditing and Credibility in Financial Reporting (2017)
Working Paper: Competing For Capital: Auditing And Credibility In Financial Reporting (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:ags:quedwp:274703

DOI: 10.22004/ag.econ.274703

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