Do Countries Falsify Economic Data Strategically? Some Evidence That They Might

Michalski, Tomasz; Stoltz, Guillaume

doi:10.1162/rest_a_00274

Cited by 87 publications

(68 citation statements)

References 29 publications

(36 reference statements)

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“…The idea that Benford's Law could be used to detect errors in economic data was first suggested by Varian (1972) with relation to economic forecasts. More recently, Michalski and Stoltz (2013) showed that this method can be used to detect errors in macroeconomic data. Carslaw (1988) used a variant of Benford's Law to argue that firms in New Zealand whose earnings did not conform to the law were rounding up their earnings numbers.…”

Section: Motivation and Contributionmentioning

confidence: 99%

Financial statement errors: evidence from the distributional properties of financial statement numbers

2015

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Motivated by methods used to evaluate the quality of data, we create a novel firm-year measure to estimate the level of error in financial statements. The measure, which has several conceptual and statistical advantages over available alternatives, assesses the extent to which features of the distribution of a firm's financial statement numbers diverge from a theoretical distribution posited by Benford's Law. After providing intuition for the theory underlying the measure, we use numerical methods to demonstrate that certain error types in financial statement numbers increase the deviation from the theoretical distribution. We corroborate the numerical analysis with simulation analysis that reveals that the introduction of errors to reported revenue also increases the deviation. We then provide empirical evidence that the measure captures financial statement data quality. We first show the measure's association with commonly used measures of accruals-based earnings management and earnings manipulation. Next, we demonstrate that (1) restated financial statements more closely conform to Benford's Law than the misstated versions in the same firm-year and (2) as divergence from Benford's Law increases, earnings persistence decreases. Finally, we show that our measure predicts material misstatements as identified by SEC Accounting and Auditing Enforcement Releases and can be used as a leading indicator to identify misstatements.

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Section: Motivation and Contributionmentioning

confidence: 99%

Financial statement errors: evidence from the distributional properties of financial statement numbers

2015

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“…35. Michalski and Stoltz (2013) find evidence that countries may strategically misreport their economic data. output, results from other studies that rely on other macroeconomic data could be more fragile than those in our sample.…”

Section: Discussionmentioning

confidence: 97%

“…Michalski and Stoltz () find evidence that countries may strategically misreport their economic data.…”

mentioning

confidence: 99%

Measurement Error in Macroeconomic Data and Economics Research: Data Revisions, Gross Domestic Product, and Gross Domestic Income

Chang

2018

Economic Inquiry

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We use a preanalysis plan to analyze the effect of measurement error on economics research using the fact that the Bureau of Economic Analysis both revises its gross domestic product (GDP) data and also publishes a second, theoretically identical estimate of U.S. output that only differs from GDP due to measurement error: gross domestic income (GDI). Using a sample of 23 models published in top economics journals, we find that reestimating models using revised GDP always gives the same qualitative result as the original publication. Estimating models using GDI instead of GDP gives a different qualitative result for three of 23 models (13%). (JEL C80, C82, E01)

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“…For more on the history of the normal distribution, see the work of Patel and Read (1982). 3 Creative applications of Benford's Law are found in connection with religious data (Makous, 2011;Mir, 2012), election frauds (Leemann & Bochsler, 2014), population studies (Sandron, 2002), auctions on eBay (Giles, 2007), survey data (Judge & Schechter, 2009), tax data (Nigrini, 1996), economic data (EU) (Michalski & Stoltz, 2013), Libor manipulations (Abrantes-Metz et al, 2012), accounting fraud detection (Nigrini, 1999), and financial reporting (McGuire, Omer, & Sharp, 2011). For a detailed list of useful application of Benford's Law, see Hürlimann (2006).…”

Section: Endnotesmentioning

confidence: 99%

Can Benford's Law explain CEO pay?

Mukherjee

2017

Corporate Governance

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Manuscript Type Empirical Research Question/Issue This study applies the statistical properties of Benford's Law to CEO pay. Benford's “Law” states that in an unbiased dataset, the first digit values are usually unequally allocated when considering the logical expectations of equal distribution. In this study we question whether the striking empirical properties of Benford's Law could be used to analyze the negotiating power and preferences of CEOs. We argue that performance‐based or market‐determined compensations should follow Benford's Law, demonstrating no direct negotiation by the CEOs. Conversely, deviation from Benford's Law could reveal CEO negotiating power or even preference. Research Findings/Insights Our analysis shows that market‐determined “Option Fair Value” (the dollar value of stock options when exercised) conforms closely to Benford's Law, as opposed to “Salary”, which is fully negotiated. “Bonus”, “Option Award”, and “Total Compensation” are generally also largely consistent with Benford's Law, but with some exceptions. We interpret these exceptions as negotiation by the CEOs. Surprisingly, we found that CEOs prefer to be paid in round figure values, especially “5”. We use Benford's Law to study the negotiating powers of CEOs vs. that of other executives. Finally, we compare the negotiating tactics of CEOs before and after SOX and analyze the impact of firm size on their compensation. Theoretical/Academic Implications This study introduces Benford's Law and its applications within the corporate governance literature. Practitioner/Policy Implications This method could be used by academics, industry and regulators to uncover compensation patterns within large business departments and/or organizations or even entire industry segments.

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Do Countries Falsify Economic Data Strategically? Some Evidence That They Might

Cited by 87 publications

References 29 publications

Financial statement errors: evidence from the distributional properties of financial statement numbers

Financial statement errors: evidence from the distributional properties of financial statement numbers

Measurement Error in Macroeconomic Data and Economics Research: Data Revisions, Gross Domestic Product, and Gross Domestic Income

Can Benford's Law explain CEO pay?

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