Corporate Fraud, Governance and Auditing Marco Pagano Università di Napoli Federico II, CSEF, EIEF and CEPR Giovanni Immordino Università di Salerno and CSEF 7 September 2009 Abstract We analyze corporate fraud in a setting in which managers have superior information but are biased against liquidation, because of their private benefits from empire building. This may induce them to misreport information and even bribe auditors when liquidation would be value-increasing. To curb fraud, shareholders optimally design internal corporate governance, by choosing audit quality and managerial compensation. Both internal governance mechanisms tend to substitute for poor shareholder protection; in contrast, audit quality tends to complement stricter auditing regulation. We also find that severance pay dominates both equity and option-based pay in improving managerial incentives. JEL classification: G28, K22, M42. Keywords: fraud, auditing, managerial compensation, corporate governance, regulation. Authors’ addresses: Marco Pagano, CSEF, Facoltà di Economia, Università di Napoli Federico II, Via Cintia, 80126 Napoli, Italy, phone +39-081-5752508, fax +39-081-5752243; e-mail [email protected] . Giovanni Immordino, Facoltà di Economia, Università di Salerno, 84084 Fisciano (SA), Italy, phone +39-089-963167, fax +39-089-963165; e-mail: [email protected] . Acknowledgements: We thank for helpful comments Ulf Axelson, Marco Celentani, Francesca Cornelli, Ingolf Dittmann, Andrew Ellul, Antoine Faure-Grimaud, Xavier Freixas, Denis Gromb, Maria Gutiérrez Urtiaga, Peggy Huang, Evgeny Lyandres, Marco Pagnozzi, Jörg Rocholl, Pablo Ruiz-Verdù, Xiaoyun Yu and seminar participants at the London Business School, Indiana University, Carlos III University, Erasmus University Rotterdam, European School of Management and Technology (Berlin), Universitat Pompeu Fabra (Barcelona), the 2006 European Summer Symposium on Financial Markets (Gerzensee), the 2007 CSEF-IGIER Symposium on Economics and Institutions (Capri), the 2007 ASSET Conference (Padua), the 2008 EEA meetings (Milan) and the 2009 EFA meetings (Bergen). Marco Pagano gratefully acknowledges financial support from the Einaudi Institute for Economics and Finance (EIEF), Fondazione IRI and the Italian Ministry for Education, University and Research (MIUR).
Corporate Fraud, Governance and Auditing
Jul 06, 2023
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