Friday, April 19, 2013
Posted by D. Daniel Sokol
Tanja Artiga Gonzalez (Swiss Institute of Banking and Finance, University of St. Gallen), Markus Schmid (Swiss Institute of Banking and Finance, University of St. Gallen), and David Yermack (Stern School of Business NYU) have a very interesting paper on Smokescreen: How Managers Behave When They Have Something To Hide. Highly recommended.
ABSTRACT: We study financial reporting and corporate governance in 216 U.S. companies accused of price fixing by antitrust authorities. We document a range of strategies used by these firms when reporting financial results, including frequent earnings smoothing, segment reclassification, and restatements. In corporate governance, cartel firms favor outside directors who are likely to be inattentive monitors due to their status as foreign or “busy.” When directors resign, they are often not replaced, and new auditors are rarely engaged. Cartel managers exercise their stock options faster than managers of other firms. While our results are based only upon firms engaged in price fixing, we expect that they should apply generally to all companies in which managers seek to conceal poor performance or personal wrongdoing.