The Cost to Firms of Cooking the Books
American University · Vanderbilt University · +5 more institutions
Abstract
Abstract We examine the penalties imposed on the 585 firms targeted by SEC enforcement actions for financial misrepresentation from 1978–2002, which we track through November 15, 2005. The penalties imposed on firms through the legal system average only $23.5 million per firm. The penalties imposed by the market, in contrast, are huge. Our point estimate of the reputational penalty—which we define as the expected loss in the present value of future cash flows due to lower sales and higher contracting and financing costs—is over 7.5 times the sum of all penalties imposed through the legal and regulatory system. For each dollar that a firm misleadingly inflates its market value, on average, it loses this dollar…
Citation impact
- FWCI
- 73.48
- Percentile
- 100%
- References
- 59
Authors
3- JMJonathan M. KarpoffCorresponding
American University, Vanderbilt University, University of Washington, Western Washington University, New York University, University of Oklahoma, Texas A&M University
- DLDongwoo Lee
American University, Vanderbilt University, University of Washington, Western Washington University, New York University, University of Oklahoma, Texas A&M University
- GSGerald S. Martin
American University, Vanderbilt University, University of Washington, Western Washington University, New York University, University of Oklahoma, Texas A&M University
Topics & keywords
- Reputation
- Misrepresentation
- Liberian dollar
- Enforcement
- Business
- Value (mathematics)
- Cash
- Point (geometry)
- Peace, Justice and strong institutions