The economics of misreporting and the role of public scrutiny

Delphine Samuels, Daniel J. Taylor and Robert E. Verrecchia

Journal of Accounting and Economics, 2021, vol. 71, issue 1

Abstract: This paper examines how the ex ante level of public scrutiny influences a manager's subsequent decision to misreport. The conventional wisdom is that high levels of public scrutiny facilitate monitoring, suggesting a negative relation between scrutiny and misreporting. However, public scrutiny also increases the weight that investors place on earnings in valuing the firm. This in turn increases the benefit of misreporting, suggesting a positive relation. We formalize these two countervailing forces–“monitoring” and “valuation”–in the context of a parsimonious model of misreporting. We show that the combination of these two forces leads to a unimodal relation. Specifically, as the level of public scrutiny increases, misreporting first increases, reaches a peak, and then decreases. We find evidence of such a relation across multiple empirical measures of misreporting, multiple measures of public scrutiny, and multiple research designs.

Keywords: Misreporting; Earnings management; Public scrutiny; EDGAR; Monitoring; Valuation (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (12)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jaecon:v:71:y:2021:i:1:s0165410120300422

DOI: 10.1016/j.jacceco.2020.101340

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