From The Hill
It’s widely assumed that executives are less likely to inflate their earnings when they work at high profile companies that operate under a good deal of regulatory oversight.
Yet it’s also widely known that managers in high-profile companies face tremendous pressure from investors to meet or beat Wall Street estimates every quarter, which incentivizes them to overstate their company’s performance.
How should policymakers looking to curb accounting fraud reconcile these countervailing forces? My colleagues —Daniel J. Taylor and Robert E. Verrecchia, both at the University of Pennsylvania’s Wharton School — and I set out to answer that question.
So, what keeps a manager honest? We argue that one piece of the puzzle lies in the quality of the information environment surrounding the company.
To test our hypothesis, we used three primary measures to gauge the quality of the information available about the firm: the number of institutional investors that own the company’s stock, the number of industry analysts that follow the company and the number of articles about the company that appeared in the mainstream media over the course of a year.
Read the full post at The Hill.
Delphine Samuels is an Assistant Professor of Accounting at the MIT Sloan School of Management.