The Economics of Misreporting and the Role of Public Scrutiny

66 Pages Posted: 23 Apr 2018 Last revised: 29 Dec 2021

See all articles by Delphine Samuels

Delphine Samuels

University of Chicago -- Booth School of Business

Daniel J. Taylor

The Wharton School, University of Pennsylvania

Robert E. Verrecchia

University of Pennsylvania - Accounting Department

Date Written: December 1, 2018

Abstract

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.

Keywords: misreporting, misrepresentation, fraud, earnings management, monitoring, valuation, information quality, information environment

JEL Classification: G14, G34, L21, M41, M42, M43

Suggested Citation

Samuels, Delphine and Taylor, Daniel and Verrecchia, Robert E., The Economics of Misreporting and the Role of Public Scrutiny (December 1, 2018). Journal of Accounting & Economics (JAE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=3157222 or http://dx.doi.org/10.2139/ssrn.3157222

Delphine Samuels

University of Chicago -- Booth School of Business ( email )

1101 East 58th Street
Chicago, IL 60637-1561
United States

Daniel Taylor (Contact Author)

The Wharton School, University of Pennsylvania ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Robert E. Verrecchia

University of Pennsylvania - Accounting Department ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States
215-898-6976 (Phone)
215-573-2054 (Fax)

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