Online from: 1988
|Title:||The cost to firms of cooking the books|
|Author(s):||Karpoff J M, Lee D S, Martin G S|
|Journal:||Journal of Financial and Quantitative Analysis, Sep 2008, Volume: 43 Issue: 3 pp.581-612 (32 pages)|
|Keywords:||Management Accounting, Misrepresentation, Misrepresentation, Penalty Costs, Usa|
|Article type:||Research paper|
|Reference:||38AA457 (Permanent URL)|
Design/methodology/approach - Cites prior studies of the penalties incurred by culpable firms. Develops a model based on that of Peltzman (1981) in assessing the true value of a firm had it not misrepresented itself against its actual value, as the cost of reputation loss. Takes a clean sample of 585 firms based on SEC and Department of Justice actions between 1978 and 2002, and their market values up to November 2005. Quantifies the fines imposed and the abnormal returns (CARs) around the date of enforcement.
Findings - Finds that the 194 firms that survived experienced a mean (CAR) loss of 34.43%., and a mean total loss of $591.75 million. Notes that 47 firms had been fined, with a median fine of $890,000, and 231 firms settled lawsuits averaging $37.7 million, in all explaining 8.8% of the market return losses. Shows loss of reputation is highest for firms with implicit contracts, and high debt leverage.
Research limitations/implications - Admits that the low survival persistence of these firms biases valuation losses downwards. Excludes penalties visited on managers. Proposes research into the relative shocks to the cost of capital and to market returns.
Originality/value - Presents an analysis of misrepresenting firms that shows the real cost of misrepresentation is very high.