The DOI matches its Crossref record; 36 of the 36 references it cites were found in a registry or an index.
The Cost to Firms of Cooking the Books
Open accessAbstract
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.
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Cites
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The Reputational Penalty for Aggressive Accounting: Earnings Restatements and Management Turnover
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Self-citationThe consequences to managers for financial misrepresentation
Karpoff, J. M., Scott Lee, D., & Martin, G. S. (2008) · Journal of Financial Economics · doi:10.1016/j.jfineco.2007.06.003 · Cited by 761
Self-citation
Cited by
Understanding Attributions of Corporate Social Irresponsibility
Lange, D., & Washburn, N. T. (2012) · Academy of Management Review · doi:10.5465/amr.2010.0522 · Cited by 710
From the Stockholder to the Stakeholder: How Sustainability Can Drive Financial Outperformance
Clark, G. L., Feiner, A., & Viehs, M. (2014) · SSRN Electronic Journal · doi:10.2139/ssrn.2508281 · Cited by 685
Business Strategy, Financial Reporting Irregularities, and Audit Effort
Bentley, K. A., Omer, T. C., & Sharp, N. Y. (2013) · Contemporary Accounting Research · doi:10.1111/j.1911-3846.2012.01174.x · Cited by 615
Corruption culture and corporate misconduct
Liu, X. (2016) · Journal of Financial Economics · doi:10.1016/j.jfineco.2016.06.005 · Cited by 580
Mishina, Y., Dykes, B. J., Block, E. S., & Pollock, T. G. (2010) · Academy of Management Journal · doi:10.5465/amj.2010.52814578 · Cited by 578
Metadata
- Authors
- Karpoff, J. M., Lee, D. S., & Martin, G. S.
- Venue
- Journal of Financial and Quantitative Analysis
- Publisher
- Cambridge University Press (CUP)
- Published
- 2008-09
- Volume
- 43
- Issue
- 3
- Pages
- 581-611
- ISSN
- 0022-1090 (ISSN-L)
- 1756-6916
- OpenAlex
- W3122978481
- Cited by
- 1,301
- References
- 36
- FWCI
- 119.56
- Type
- journal article
- Language
- en
- Open access
- bronze
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Bibliographic data: Semantic Scholar, OpenAlex, Crossref.
Contains information from the Semantic Scholar Academic Graph Datasets, made available under the ODC Attribution License (ODC-BY 1.0).
Semantic Scholar’s data is described in: Kinney, R., et al. (2023). The Semantic Scholar Open Data Platform. arXiv:2301.10140.
