Benford and the Internal Capital Market: A Useful Indicator of Managerial Engagement

El Mouaaouy Florian and Riepe Jan
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El Mouaaouy Florian: Ludwig-Maximilians-Universität München,Munich, Bavaria, Germany
Riepe Jan: Eberhard-Karls University Tübingen,Tübingen, Germany

German Economic Review, 2018, vol. 19, issue 3, 309-329

Abstract: We propose the application of digit analysis using the Benford law to indicate managerial engagement in the capital allocation process. First, we motivate the potential of the Benford digit analysis to identify allocation outcomes that are shaped by human engagement instead of fixed decision rules. Second, we provide a case study to illustrate how the Benford digit analysis can be used to detect allocations affected by managerial interventions. We are unaware of any study applying the Benford test to internal capital markets, while this approach appears very useful in this context. It is commonly used in the auditing, financial accounting, and fraud detection literature.

Keywords: Internal capital allocation; the Benford law; managerial engagement (search for similar items in EconPapers)
Date: 2018
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DOI: 10.1111/geer.12129

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