Competing for Capital: Auditing and Credibility in Financial Reporting

Raphael Boleslavsky, Bruce I. Carlin and Christopher Cotton

No 23273, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: D43 G3 (search for similar items in EconPapers)
Date: 2017-03
New Economics Papers: this item is included in nep-acc
Note: CF
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Working Paper: Competing For Capital: Auditing And Credibility In Financial Reporting (2017)
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