Working Paper: NBER ID: w18886
Authors: Tanja Artiga Gonzlez; Markus Schmid; David Yermack
Abstract: We study financial reporting and corporate governance in 218 companies accused of price fixing. These firms engage in evasive financial reporting strategies, including earnings smoothing, segment reclassification, and restatements. In corporate governance, cartel firms favor outside directors likely to monitor inattentively due to low attendance, other board seats, and overseas residence. When directors resign, they are often not replaced, and auditors are rarely switched. Cartel firms have unusually low CEO turnover and rely on internal management promotions. Their managers exercise stock options faster than managers of other firms. Cartel firms are large donors to political candidates. 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 wrongdoing.
Keywords: Financial Reporting; Corporate Governance; Price Fixing; Cartels; Earnings Management
JEL Codes: D43; G34; L40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| corporate governance (G38) | cartel formation (L12) |
| corporate governance (G38) | cartel continuation (L12) |
| governance structures (G38) | evasive financial reporting strategies (G38) |
| low CEO turnover (M12) | continuity in management (M54) |
| stock options exercise (G13) | capitalizing on inflated stock prices (G19) |
| outside directors (G34) | ineffective monitoring (E61) |
| lack of oversight (G38) | evasive financial reporting strategies (G38) |