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1 Introduction Existing literature has given rise to two seemingly antagonistic approaches to modeling the frictions to the disclosure of evidence. The first approach, initiated by Jovanovic (1982) and Verrecchia (1983), posits a disclosure cost, such that the informed party incurs a loss from publicly disclosing information.
Using misstatement data, we find that the distribution of detected fraud features a heavy tail. We propose a theoretical mechanism that explains such a relatively high frequency of extreme frauds. In our dynamic model, a manager manipulates earnings for personal gain. A monitor of uncertain quality can detect fraud and punish the manager. As the monitor fails to detect fraud, the manager's posterior belief about the monitor's effectiveness decreases.
Abstract We present a model in which investment capacity is re-allocated in response to aggregate shocks and examine the resulting general equilibrium effects. The theory predicts a positive association between aggregate liquidity shocks, cost of capital, and conservative accounting. When capital becomes scarce, the accounting system is designed to preserve collateral, which depletes the supply of traded capital and leads to a higher cost of capital.
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