Socially Efficient Managerial Dishonesty

Damien Besancenot and Radu Vranceanu

No DR 05005, ESSEC Working Papers from ESSEC Research Center, ESSEC Business School

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 (search for similar items in EconPapers)
JEL-codes: D82 G33 G38 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2005-05
New Economics Papers: this item is included in nep-bec and nep-fin
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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