Financial Statement Management as a Prisoners' Dilemma Game

Abstract

Some aspects of a firm's financial well-being depend on how it compares to similar firms. This suggests that accounting, financing and production choices that alter a firm's comparisons through their effects on the firm's financial statements will depend on the choices of similar firms: that is, these choices arise from competition between firms. We model these choices as choices made in a (quasi) prisoners' dilemma game. One feature of such games is that when firms make individually optimal choices, all firms in the game end up worse off. We examine revenue enhancement through trade loading, off-balance-sheet financing and segmental reporting decisions and show that our model's predictions are generally consistent with actual firm choices.

JEL Classification: M21, M41