Corporate Fraud, Governance and Auditing

Marco Pagano and Giovanni Immordino

No 909, EIEF Working Papers Series from Einaudi Institute for Economics and Finance (EIEF)

Abstract: We analyze corporate fraud in a setting 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 design internal corporate governance, by choosing audit quality and managerial compensation. Both internal governance mechanisms tend to substitute for poor shareholder protection; in contrast, audit quality tends to complement stricter auditing regulation. We also find that severance pay dominates both equity and option-based pay in improving managerial incentives.

Pages: 51 pages
Date: 2009, Revised 2009-09
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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 (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:eie:wpaper:0909

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