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October 2008

Lest you think accounting fraud is not punished enough

Have a look at Karpoff, Lee, and Martin, "The Cost to Firms of Cooking the Books", Journal of Financial and Quantitative Analysis, September 2008. Working paper version here.

We examine the penalties imposed on the 585 firms targeted by SEC enforcement actions for financial misrepresentation from 1978-2002, which we track through November 15, 2005, The penalties imposed on firms through the legal system average only $23,5 million per firm. The penalties imposed by the market, in contrast, are huge. Our point estimate of the reputational penalty—which we define as the expected loss in the present value of future cash flows due to lower sales and higher contracting and financing costs—is over 7,5 times the sum of all penalties imposed through the legal and regulatory system. For each dollar that a firm misleadingly infiates its market value, on average, it loses this dollar when its misconduct is revealed, plus an additional $3,08, Of this additional loss, $0,36 is due to expected legal penalties and $2,71 is due to lost reputation. In firms that survive the enforcement process, lost reputation is even greater at $3,83, In the cross section, the reputation loss is positively related to measures of the firm's reliance on implicit contracts. This evidence belies a widespread belief that financial misrepresentation is disciplined lightly. To the contrary, reputation losses impose substantial penalties for cooking the books.

"The New Classics of Computer Science"

"We all know about the classic texts of computer science (although, we may be a bit behind on our reading). . . .

"Recently, I moved from Chicago to Cambridge and could only bring a few dozen books with me. I was forced to evaluate which are truly timeless classics, and which are just tutorials. . . .

"When I sat down and thought about it, many of the books that have had the greatest impact on me as a programmer (and as a thinker in general) aren’t even Computer Science books. These books below often transcend their stated domain and impart a new way of looking at all problems."

(I haven't read any of the five books listed, but given world enough and time, I probably would.)