The economics of misreporting and the role of public scrutiny

• 成果类型: Article
• 署名作者: Samuels, Delphine; Taylor, Daniel J.; Verrecchia, Robert E.
• 署名单位: University of Chicago; University of Pennsylvania
• 刊物名称: JOURNAL OF ACCOUNTING & ECONOMICS
• ISSN/ISSBN: 0165-4101
• DOI: 10.1016/j.jacceco.2020.101340
• 发表日期: 2021
• 关键词: institutional investors; earnings; COMPENSATION; determinants; INFORMATION; QUALITY; proxies; MARKET

摘要

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 valu-ation-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. (C) 2020 Elsevier B.V. All rights reserved. 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. Understanding the motives for misreporting is of paramount interest to investors, regulators, and practitioners. Perhaps for this reason, a vast academic literature examines the causes of misreporting and the various mechanisms that can mitigate it. Many studies in this literature explicitly link the misreporting decision to the cost-benefit tradeoff facing the manager, and seek to provide insight on settings where managers will be more (or less) likely to misreport. In this paper, we analytically and empirically examine how the ex ante level of public scrutiny (i.e., the level of public scrutiny prior to misreporting) alters the cost-benefit tradeoff facing managers and influences their subsequent decision to misreport. The conventional wisdom is that greater public scrutiny reduces the incidence of misreporting. The intuition is compelling: greater scrutiny increases the probability of detection (e.g., Ferri et al., 2018). If the probability of detection is higher, the expected cost is higher and, in equilibrium, the incidence of misreporting should be lower. This intuition has led much of the prior literature to predict that misreporting is most pronounced in settings characterized by minimal scrutiny (e.g., Dechow et al., 2010). However, this intuition is incomplete. Prior research shows that greater public scrutiny increases the weight that investors