Corporate Fraud, Governance and Auditing

Marco Pagano and Giovanni Immordino

No 7104, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We analyze corporate fraud in a model in which managers have superior information but are biased against liquidation, because of their private benefits from empire building. This may induce them to misreport information and even bribe auditors when liquidation would be value-increasing. To curb fraud, shareholders optimally choose auditing quality and the performance sensitivity of managerial pay, taking external corporate governance and auditing regulation into account. For given managerial pay, it is optimal to rely on auditing when external governance is in an intermediate range. When both auditing and incentive pay are used, worse external governance must be balanced by heavier reliance on both of those incentive mechanisms. In designing managerial pay, equity can improve managerial incentives while stock options worsen them.

Keywords: Accounting fraud; Auditing; Corporate governance; Managerial compensation; Regulation (search for similar items in EconPapers)
JEL-codes: G28 K22 M42 (search for similar items in EconPapers)
Date: 2008-12
New Economics Papers: this item is included in nep-acc, nep-cta, nep-law and nep-reg
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Corporate Fraud, Governance, and Auditing (2012)
Working Paper: Corporate Fraud, Governance and Auditing (2012)
Working Paper: Corporate Fraud, Governance and Auditing (2009)
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