The Information Limit to Honest Managerial Behavior

Damien Besancenot and Radu Vranceanu

No DR 04008, ESSEC Working Papers from ESSEC Research Center, ESSEC Business School

Abstract: In the last years of the Internet bubble, many managers provided fraudulent financial statements with the aim at inflating the market value of their firms. Is this shortage of honesty an accident or a buit-in feature of shareholder capitalism? This paper argues that in an economy hosting publicly traded companies where investors have only imperfect information about a firm’s type and where a honest financial report may be wrong, at least some bad firms managers will provide false statements. Furthermore, in equilibrium some good firm managers may also resort to corrupt auditors which will issue a favorable report without carrying out any investigation. The frequency of dishonest managers is analysed in keeping with the precision of the report and the total number of firms.

Keywords: Corporate fraud; Accounting information; Manager behavior; Honesty; Perfect Bayesian Equilibrium (search for similar items in EconPapers)
JEL-codes: D84 G30 M41 Z13 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2004-09
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