The Cost to Firms of Cooking the Books

Datos Bibliográficos

ID23328181
AutoresJonathan M Karpoff (0000-0002-5981-8320, American University), Dongwoo Lee (0000-0002-0152-7598, American University), D Scott Lee, Gerald S Martin (0000-0002-2726-8774, American University)
Año2008
Volumen43
Número3
Páginas581-611
Fecha de publicación2008-09-01
Peer ReviewedSí
Open AccessSí
TipoARTICLE
RevistaJournal of Financial and Quantitative Analysis (JOURNAL)
Identificadores de la revistaISSN: 0022-1090 • E-ISSN: 1756-6916
EditorialCambridge University Press (CUP) (PUBLISHER)
DOI10.1017/s0022109000004221
OpenAlexW3122978481
IdiomaEN
Citas recibidas53
Referencias citadas34

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 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.

Business · Cash · Economics · Enforcement · Liberian dollar · Misrepresentation · Monetary economics · Point (geometry) · Reputation · Value (mathematics) · Auditing, Earnings Management, Governance · Corporate Finance and Governance · Finance · Financial Markets and Investment Strategies · Law