Competing For Capital: Auditing And Credibility In Financial Reporting

Bruce Carlin, Christopher Cotton and Raphael Boleslavsky
Additional contact information
Bruce Carlin: UCLA
Raphael Boleslavsky: University of Miami

No 1377, Working Paper from Economics Department, Queen's University

Abstract: When self-interested agents compete for scarce resources, they often exaggerate the promise of their activities. As such, principals must consider both the quality of each opportunity and each agentÂ’s credibility. We show that principals are better off with less transparency because they gain access to better investments. This is due to a complementarity between the agents' effort provision and their ability to exaggerate. As such, it is suboptimal for principals to prevent misreporting, even if doing so is costless. This helps explain why exaggeration is ubiquitous during allocation decisions: money management, analyst coverage, private equity fundraising, and venture capital investments.

Keywords: Auditing; Monitoring; Financial Reporting; Capital Budgeting; Exaggeration (search for similar items in EconPapers)
JEL-codes: D83 G14 G31 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2017-01
New Economics Papers: this item is included in nep-acc
References: View references in EconPapers View complete reference list from CitEc
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https://www.econ.queensu.ca/sites/econ.queensu.ca/files/qed_wp_1377.pdf First version 2017 (application/pdf)

Related works:
Working Paper: Competing for Capital: Auditing and Credibility in Financial Reporting (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:qed:wpaper:1377

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