The Cost to Firms of Cooking the Books

Journal of Financial and Quantitative Analysis - Tập 43 Số 3 - Trang 581-611 - 2008
Jonathan M. Karpoff1,2,3,4,5, Dongwoo Lee1,2,3,4,5, Gerald S. Martin1,2,3,4,5
1 Vanderbilt University Law and Business Conference,
2Foster School of Business, University of Washington, Box 353200, Seattle, WA 98195; Lee,
3Kogod School of Busi-ness, American University, 4400 Massachusetts Ave NW, Washington, DC 20016.
4Mayes Business School, Texas A&M University, 4218 TAMU, College Station, TX 77843; and Martin,
5Norwegian School of Management, Colorado State University, the Norwegian School of Economics and Business, the University of California at Davis, New York University, the University of Oklahoma, the University of Texas' 2004 Conference on Corporate Governance, the University of Washington, and Western Washington University

Tóm tắt

AbstractWe 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 when its misconduct is revealed, plus an additional $3.08. Of this additional loss, $0.36 is due to expected legal penalties and $2.71 is due to lost reputation. In firms that survive the enforcement process, lost reputation is even greater at $3.83. In the cross section, the reputation loss is positively related to measures of the firm's reliance on implicit contracts. This evidence belies a widespread belief that financial misrepresentation is disciplined lightly. To the contrary, reputation losses impose substantial penalties for cooking the books.

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Thông tin xuất bản

Journal of Financial and Quantitative Analysis

Tập 43 Số 3

581-611

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