NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Economics of Fraudulent Accounting

Simi Kedia, Thomas Philippon

NBER Working Paper No. 11573
Issued in August 2005
NBER Program(s):   AP   EFG

We argue that earnings management and fraudulent accounting have important economic consequences. In a model where the costs of earnings management are endogenous, we show that in equilibrium, bad managers hire and invest too much in order to pool with the good managers. This behavior distorts the allocation of economic resources among firms. We test the predictions of the model using new historical and firm-level data. First, we show that periods of high stock market valuations are systematically followed by large increases in reported frauds. We then show that during periods of suspicious accounting, firms hire and invest excessively, while insiders exercise options and sell stocks. When the misreporting is detected, firms shed labor and capital and productivity improves. In the aggregate, our model seems able to account for periods of jobless and investment-less growth.

download in pdf format
   (672 K)

email paper

This paper is available as PDF (672 K) or via email.

This paper was revised on February 3, 2006

Machine-readable bibliographic record - MARC, RIS, BibTeX

Published: Kedia, Simi and Thomas Philippon. "The Economics of Fraudulent Accounting." Review of Financial Studies 22, 6 (2009): 2169-2199.

Users who downloaded this paper also downloaded these:
Greenstein and McDevitt w14758 The Broadband Bonus: Accounting for Broadband Internet's Impact on U.S. GDP
Weil w11455 Accounting for the Effect of Health on Economic Growth
Hulten w15341 Growth Accounting
Laux and Leuz w15515 Did Fair-Value Accounting Contribute to the Financial Crisis?
Dyck, Morse, and Zingales w12882 Who Blows the Whistle on Corporate Fraud?
 
Publications
Activities
Meetings
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us