Negotiation, Organizations and Markets

Research Papers

Harvard NOM Research Paper No. 06-06

Barbados Group Working Paper No. 01-06

Putting Integrity Into Finance Theory and Practice: A

Positive Approach (pdf of Keynote slides)

Michael C. Jensen
Jessie Isidor Strauss Professor Emeritus, Harvard Business School;
Managing Director Organizational Strategy Practice, The Monitor Group
MJensen@[Link]

January 28, 2011

FAIR USE: You may redistribute this document freely, but please do not post the electronic file on the web. I
welcome web links to this document at: [Link]
I revise my papers regularly, and providing a link to the original ensures that readers will receive the most recent
version. Thank you, Michael C. Jensen

Some of this material is drawn from the following papers:

Erhard, Werner, Jensen, Michael C. and Zaffron, Steve, "Integrity: A Positive Model that Incorporates the
Normative Phenomena of Morality, Ethics and Legality" (April 07, 2008). Harvard Business School NOM Working
Paper No. 06-11, Barbados Group Working Paper No. 06-03.
Available from the following private url at SSRN: [Link]

Michael C. Jensen., Kevin J. Murphy, and Eric G. Wruck, "Remuneration: Where We've Been, How We Got to
Here, What are the Problems, and How to Fix Them" (July 12, 2004). HBS NOM Paper No 04-28,
[Link]

© Michael C. Jensen, 2009-2011. All Rights Reserved

Electronic
Electroniccopy
copyavailable
availableat:
at:[Link]
[Link]
 Abstract

Finance theory and practice are incomplete without an integrated theory of integrity. Following Erhard,
Jensen and Zaffron (2007) I define integrity without reference to morals, values, religion, or ethics.
Something is in integrity if it is whole, complete and sound. Integrity is closely related to workability
because an entity or system that is out of integrity will not be whole, complete and sound. Workability is
the bridge to value. The farther out of integrity the less well any given entity will work.

The positive proposition that increasing the integrity of a firm will contribute to increasing its value is no
different in kind from the positive proposition that the net present value investment rule will lead to value
creation. The theory thus implies that integrity is a necessary, but not sufficient condition for the
maximization of long-term value. The theory is testable and refutable.

I illustrate the application of this concept in finance by considering:

1. The implicitly held proposition that firm’s managers owe fiduciary responsibility to current shareholders
only (excluding current and future bondholders and future shareholders). This leads to the widely held
recommendation/belief that the appropriate action for a firm whose equity is substantially overvalued is to
sell new equity and pay out the proceeds to current shareholders or to acquire a less overvalued firm
through an equity transaction. Both of these policies will create a system in which future shareholders find
that they have been taken in the transaction. Policies that expropriate wealth from future shareholders or
bondholders cannot contribute to the creation of long-term value. Interestingly, U.S. disclosure laws
provide some obligations for managers to take into account the interests of future bond and stockholders.

2. I discuss the extensive empirical evidence on the puzzling low-integrity value-destroying equilibrium
between managers and capital markets and argue that understanding how this equilibrium continues to exist
is a major challenge for our profession.

Keywords: Integrity, Lies, Lying, Managing Earnings, Smoothing Earnings, Collusion, Development,
Disclosure Strategy, Fiduciary Responsibility, Financial Reporting, Accounting Errors, Fraud

First presented on the occasion of the presentation of the “LECG Lifetime Achievement Award in Recognition of his
Contributions to the Field of Financial Economics” to Michael C. Jensen at the meetings of the American Finance Association,
Boston, MA, Jan. 6, 2006; also presented to the Centre for Corporate Governance, London Business School, London, UK, Jan.
19, 2006; the Center for Corporate Governance, LeBow College of Business, Drexel University, Philadelphia, PA, March 1,
2006; Journal of Corporate Finance Conference on Private Equity, LBOs, and Corporate Governance, Rensselaer Polytechnic
Institute, Troy, NY, April 21, 2006; CFO Forum, U. of Washington Business School, Seattle, WA, May 17, 2006, JOIMs Fall
2006 Conference, Boston, MA, Sept. 2006, Zicklin Center for Corporate Integrity, Baruch College, NYC, Oct. 2006; State Street
Global Markets 7th Annual Research retreat, Boston, MA March 1, 2007: Society of Quantitative Analysts (SQA) Society, Fuzzy
Day Conference, NY, NY, June 18, 2007; Smith Breeden Associates’ Investment Research Seminar, Pinehurst, NC, Oct. 4,
2007; Tuck School of Business, Corporate Governance Workshop for Large Institutional Investors, Oct. 8, 2007; Deutsche Asset
Management, Global Quantitative Investor Strategies: The Art of Alpha and Beta, NY, NY, Oct. 17, 2007; Financial
Management Association, Orlando, FL, Oct. 18, 2007; DeAM European Investor Conference -- Alternative Sources of Alpha:
The Art of Alpha and Beta, Berlin, Germany, Nov. 7, 2007; U. of South Florida and Society of Financial Analysts Conference on
The Relationship of Value to Governance, Tampa, FL, Feb. 2008; London Business School Private Equity Institute Seminar,
April 14, 2008; Mays School of Business, Texas A&M University, Feb. 10, 2009; Keynote Address, Financial Intermediation
Research Society (FIRS), Prague, Czech Republic, May 29, 2009; and Keynote Address, European J. of Finance and J. of
Business Ethics Joint Conference: Law, Ethics and Finance, Schulich Business School, York U., Sept. 17, 2010; Financial
Accounting and Reporting Section (FARS) of the American Accounting Association (AAA), Plenary Session, Tampa,
FL,January 28, 2011.

© Michael C. Jensen, 2009-2011. All Rights Reserved

Electronic
Electroniccopy
copyavailable
availableat:
at:[Link]
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Putting Integrity Into Finance: A Positive
Approach
Financial Accounting and Reporting Section (FARS) of the
American Accounting Association (AAA)
Plenary Session
Tampa, FL
January 28, 2011

Michael C. Jensen
Jesse Isidor Straus Professor of Business, Emeritus,
Harvard Business School
Co-Founder and Chairman, SSRN

Some of the material here is based on:

Michael C. Jensen., Kevin J. Murphy, and Eric G. Wruck, "Remuneration: Where
We've Been, How We Got to Here, What are the Problems, and How to Fix
Them" (July 12, 2004). HBS NOM Paper No 04-28, [Link]
and
Werner Erhard, Michael C. Jensen, Steve Zaffron, “Integrity: A Positive Model that
Incorporates the Normative Phenomena of Morality, Ethics and Legality”
[Link] [Link]

© Michael C. Jensen, 2008-2011. All Rights Reserved

Electronic
Electroniccopy
copyavailable
availableat:
at:[Link]
[Link]
My Intention Today
Begin the development of a language and model to deal
with the effects of integrity on corporate, market,
personal and policy issues in finance, accounting,
governance and compensation
Define integrity (without reference to ethical or moral
values): Thus integrity becomes a purely positive
phenomenon
Discuss the effects of integrity on firm value
Summarize the evidence on the low-integrity
equilibrium between firms and markets
In effect, integrity is a factor of production just like
knowledge, technology, labor and capital, but it is
undistinguished--and its affect on workability,
productivity, value and quality
2
of life is huge.
© Michael C. Jensen, 2008-2011. All Rights Reserved
Electronic copy available at: [Link]
 Invitation and Warning for
the Audience
What I will say about integrity shortly will stretch most of us
here today.
What I am talking about today is highly relevant to and
complementary to economics, business and management and
has huge economic implications.
Yet, it is NOT economics, the roots of what I am talking about
today are in:
Philosophy
Ontology: the science of the nature of being
Bear with me since what I will be saying now about integrity
will not fit your current world view, and if I am successful it will
shift your world view to a more powerful place.
I ask you to judge at the end of the discussion today.
3
© Michael C. Jensen, 2008-2011. All Rights Reserved
Electronic copy available at: [Link]
Integrity:
Definition: Webster’s New World Dictionary.
1. the quality or state of being complete;
unbroken condition; wholeness; entirety
2. the quality or state of being unimpaired;
perfect condition; soundness
3. the quality or state of being of sound moral
principle; uprightness, honesty, and sincerity
I use the word in this work according to Definitions 1
and 2.
I do not use it to refer to a moral or ethical code or
to denote right vs. wrong, or good vs. bad
The way I use integrity it is not religion, it is not
ethics, and is defined without reference to values
4
© Michael C. Jensen, 2008-2011. All Rights Reserved
Electronic copy available at: [Link]
The Long-Neglected Scientific Role
of Integrity in Finance
Finance and economics scholars tend to avoid discussions or
considerations of integrity because it occurs to them as
“normative”
Whether you like integrity or not is a normative value
judgement on your part
The effect of integrity or the lack of it on value, productivity, etc.,
is a positive proposition
My posited link between integrity and value is no more
normative than the posited link between the net present value
rule for investment decisions & corporate value.
“Long run value maximization requires integrity” is a positive
proposition that is testable and refutable
And the positive effects of integrity or its absence have too
long been ignored in finance and economics
Integrity is a necessary but not sufficient condition for long-
run value maximization
5
© Michael C. Jensen, 2008-2011. All Rights Reserved
Electronic copy available at: [Link]
Integrity: Summary
An entity has integrity when it is whole and complete
An object without integrity doesn’t work
Think of a wheel with missing spokes, it is not
whole, complete and stable. It will become out-of-
round, work less well and eventually stop working
entirely

6
© Michael C. Jensen, 2008-2011. All Rights Reserved
Electronic copy available at: [Link]
Integrity: Summary (continued)
A person is in integrity when he or she honors his or her
word
Keeping one’s word means you fulfill your commitments
and promises in full and on time.
If you always keep your commitments and promises
you are not playing a big enough game in life.
Honoring your word means that you either:
Keep your commitments and promises on time, or
When you have failed to keep a commitment or
promise you:
Acknowledge that failure as soon as you realize it
And clean up any mess you created for those who
were counting on your commitments and
promises.
7
© Michael C. Jensen, 2008-2011. All Rights Reserved
Electronic copy available at: [Link]
Integrity: Summary (continued)
Honoring your word means that you are honest and
straightforward:
That means nothing is hidden, no deception, no
untruths, no violation of contracts or property
rights, etc.
And because your word also includes conforming to
the rules of the games you are in (for example,
ethical standards of the profession or organization
you are in, moral and legal standards of the society
you are in):
If you refuse to play by any of the rules of the
games you are in, integrity requires you to make
this clear to all others
And to willingly bear the costs of doing so
8
© Michael C. Jensen, 2008-2011. All Rights Reserved
Electronic copy available at: [Link]
Integrity: Summary (continued)
An organization or system is in integrity when it is whole and
complete
That means honoring its word, both to its employees and
to its customers, suppliers and other stakeholders.
That means nothing is hidden, no deception, no
untruths, no violation of contracts or property rights,
etc.
If it refuses to play by any of the rules of the game it is
in, integrity requires it to make this clear to all others.

9
© Michael C. Jensen, 2008-2011. All Rights Reserved
Electronic copy available at: [Link]
Workability: The Bridge between
Integrity and Value Creation
The greater an entity, person, or system is out of
integrity, the less well it works

Put simply (and somewhat overstated) :

“Without integrity nothing works”

We use this as a heuristic

Put more carefully:

As integrity declines, workability declines, and

as workability declines, value declines

Thus value maximization requires integrity

10
© Michael C. Jensen, 2008-2011. All Rights Reserved
Electronic copy available at: [Link]
A Cautionary Note:
Their is much to be said about defining more
precisely what one’s word is.

But we do not have time to do that today in detail.

A detailed discussion is available on SSRN at the

following:
Werner Erhard, Michael C. Jensen, Steve Zaffron, “Integrity: A Positive
Model that Incorporates the Normative Phenomena of Morality, Ethics and
Legality” [Link] an abridged version is at http://
[Link]/abstract=1542759, and a short overview is at
[Link]

Erhard, Werner, Jensen, Michael C. and Zaffron, Steve,A New Model of

Integrity: An Actionable Pathway to Trust, Productivity and Value (PDF
File of Keynote Slides). [Link]
11
© Michael C. Jensen, 2008-2011. All Rights Reserved
Electronic copy available at: [Link]
Three Aspects of the Integrity of
Objects and Systems
An Object or System is in integrity when the following 3
conditions hold:
1. The Design of the object or system is whole and
complete (in the sense that the design is capable of
producing the intended result or performance)
2. The Implementation of the Design is whole and complete
in the sense that the object or system faithfully produces
the result it was designed to produce.
3. The Use of the implemented object or system has
integrity in that it is consistent with its designed purpose.
For example, a 200 pound man using a life vest designed
for a 50 lb child will drown unless he can swim
12
© Michael C. Jensen, 2008-2011. All Rights Reserved
Electronic copy available at: [Link]
Integrity for A Person or
Organization -- Your Word Defined:
W1. What You Said: Whatever you said you will do, or will
not do (and in the case of do, doing it on time). (Note:
Requests of you become your word unless you have
responded to them in a timely fashion.)
W2. What You Know: Whatever you know to do, or know not
to do, and if it is do, doing it as you know it is meant to be
done (and doing it on time), unless you have explicitly said
to the contrary.
W3. What Is Expected: Whatever you are expected to do or
not do (and in the case of do, doing it on time), unless you
have explicitly said to the contrary. (Note: What you expect
of others is not for you their word.)
W4. What You Say Is So: Whenever you have given your
word to others as to the existence of some thing or some
state of the world, your word includes being willing to be
held accountable that the others would find your evidence
makes what you have asserted valid for themselves.
NOTE: This is your Word, not Integrity
13
© Michael C. Jensen, 2008-2011. All Rights Reserved
Electronic copy available at: [Link]
Your Word Defined: (Cont’d)
W6. Morality, Ethics and Legality are all about
right and wrong, good and bad behavior: They are
the standards for good and bad behavior
The Social Moral Standards, the Group Ethical
Standards and the Governmental Legal Standards
of right and wrong, good and bad behavior in the
society, groups and state in which I enjoy the
benefits of membership
Are also part of my word (Word 6) (what I am
expected to do)
Unless I have explicitly and publicly expressed my
intention to not keep one or more of them, and
I am willing to bear the costs (including punishment)
of refusing to conform to these Standards (rules of
the game I am in) 14 © Michael C. Jensen, 2008-2011. All Rights Reserved
Electronic copy available at: [Link]
Your Word Defined: (Cont’d)
In fact I have honored my word with respect to these
normative standards
In summary, Morality, Ethics and Legality are part
of your word by your mere presence -- unless you
explicitly say that you do not give your word to
one or more of those “rules”.
Converts the word of others that is imposed
on you to your word
To be in integrity you must inform all those in the
game you are playing when you are not going to
follow one or more of the rules of the game and
willingly bear the consequences of doing so.
Gandhi is an example. He was explicit about the rules
he would not follow and was willing to bear the
consequences 15
© Michael C. Jensen, 2008-2011. All Rights Reserved
Electronic copy available at: [Link]
 A Picture of Integrity

What would your life be and what performance

would be if it were true that:
You have done what you said you would do and you did it
on time
You have done what you know to do, you did it the way it
was meant to be done, and you did it on time
You have done what others would expect you to do , even
if you never said you would do it, and you did it on time

Werner Erhard, Michael C. Jensen, Steve Zaffron, “Integrity: A Positive Model that
© 2009 Werner Erhard, Michael Jensen, Steve
Incorporates the Normative Phenomena of Morality, Ethics and Legality” 16
[Link] © Michael C. Jensen,
Zaffron, Landmark AllAll
Education,
2008-2011. RightsReserved
Rights Reserved

Electronic copy available at: [Link]

 Picture of Integrity: Continued
And whenever you realized that you were not going to
do any of the foregoing, or not going to do it on time:
You have said so to everyone who might be impacted, and
you did so just as soon as you realized that you wouldn't
be doing it, or wouldn't be doing it on time, &
If you were going to do it in the future you have said by
when you would do it, or
If you won’t be doing it at all, you have said so, and
You have dealt with the consequences of your not doing it
on time, or not doing it at all, for all those who are
impacted by your not doing it on time, or not doing it at
all
In a sentence, you have done what you said you would do, or
you have said you are not doing it; you have nothing hidden,
you are truthful, forthright, straight and honest. And you
have cleaned up the mess you have caused for those
depending on your word.
Werner Erhard, Michael C. Jensen, Steve Zaffron, “Integrity: A Positive Model that
© 2007 Werner Erhard, Michael Jensen, Steve
Incorporates the Normative Phenomena of Morality, Ethics and Legality” 17
[Link] © Michael C. Jensen,
Zaffron, Landmark AllAll
Education,
2008-2011. RightsReserved
Rights Reserved

Electronic copy available at: [Link]

Some Areas in Finance Theory and
Practice where Integrity Is Lacking
Recommedations to firms whose equity is overvalued
Sell stock or bonds, acquire a less-overvalued firm for stock
Budget & Target-based compensation plans
Pay people according to how close they meet their targets
Managing relations with capital markets
Financial reporting choices are strategic and must be made to
manage what the “street” expects and to give the street what it
expects

18
© Michael C. Jensen, 2008-2011. All Rights Reserved
Electronic copy available at: [Link]
Some Areas in Finance Theory where
Integrity Is Lacking (Cont’d)
Long history of implicitly defining the fiduciary duty of
managers to be to current shareholders only
Ignoring future shareholders and current and future
bondholders
This leads to a system that is out of integrity, ie., it is
not whole, complete
Consider the common recommendation for managers
with an overvalued stock to issue new stock at the
current high price (or make stock acquisitions) to
benefit current shareholders at the expense of future
shareholders and (implicitly) to hide what they are doing
What happens when new shareholders discover they
were taken?
The law does provides some explicit obligation to future
bond and shareholders through disclosure rules and
regulations 19
© Michael C. Jensen, 2008-2011. All Rights Reserved
Electronic copy available at: [Link]
Some Areas in Finance Theory where
Integrity Is Lacking (Continued)
Consider the attitudes of sellers of new issues and the investment
bankers who counsel them
When a CEO takes his firm public by selling shares to the public he
is creating a fiduciary relationship between himself and the holders of
those securities
The word he or she gives implicitly or explicitly to those purchasers
regarding the value of those securities is an important part of that
relationship
That word must be given with the same standards as that of the
fiduciary relationship the sale creates
If the CEO lies, withholds, or otherwise misleads those
purchasing the shares, the fiduciary relationship the transaction
creates is sullied, and the ongoing workability of that relationship
is seriously damaged
And as workability declines the opportunity for performance is
diminished
Few CEOs and few investment bankers take this attitude to pricing a
new issue 20
© Michael C. Jensen, 2008-2011. All Rights Reserved
Electronic copy available at: [Link]
The Puzzling State of Low-Integrity
Behavioral Norms in Capital Markets
Managers regularly choose to treat the firm’s relations
with the capital markets as a game where reporting is
not about creating long-term value but a strategy for
managing and meeting analyst expectations
Managing Earnings, Income Smoothing and
Manipulating financial analysts are not whole and
complete
And on the part of banks & investment banks:
Misleading investors with fraudulent investment
recommendations that purportedly are designed to
serve clients is not whole and complete
Money managers allowing after hours market timing
without notifying investors are out of integrity
21
© Michael C. Jensen, 2008-2011. All Rights Reserved
Electronic copy available at: [Link]
The Puzzling State of Low-Integrity
Behavioral Norms (continued)
Investment Banks abusing their privileged position
with clients by trading and profiting on their inside
information:
Bodnaruk, Massa, and Simonov (2007), "The Dark Role of Investment
Banks in the Market for Corporate Control"

“We argue that advisors are privy to information about the deal
that they may directly exploit by investing in the target firm.
We show that the advisors to the bidders often have positions
in the target before the deal announcement and that [they]
profit from such a position. A trading strategy conditional on
the advisor’s stake delivers a net-of-risk performance of 4.08%
per month. This cannot be replicated using publicly available
information.”
“Advisors not only take positions in the deals on which they
advise, but also directly affect the outcome of the deals,
negotiating conditions that increase the probability of success.
This has negative implications for the viability of the new
entities.” 22
© Michael C. Jensen, 2008-2011. All Rights Reserved
Electronic copy available at: [Link]
An Apparent Non-Value Maximizing
Equilibrium with Markets
Until recently it was generally considered part of
every top manager’s job to “manage earnings” (and
this still tends to be true, but somewhat less so)
When managers make any decisions other than those
that maximize value in order to affect reporting to the
capital markets they are lying
And for too long we in finance have implicitly
condoned or even collaborated in this lying
Specifically I am referring to “managing earnings”,
“income smoothing”, etc.
These issues are not merely one of deciding on a
strategy--they involve integrity and their generally
unappreciated, negative long-run value effects
23
© Michael C. Jensen, 2008-2011. All Rights Reserved
Electronic copy available at: [Link]
On the Importance of
Language
Language affects the way the world occurs to people and
therefore affects their behavior
Making decisions other than those that maximize long
term value in order to “manage” earnings is “lying”
When we use terms other than lying to describe “earnings
management” behavior we inadvertently encourage the
sacrifice of integrity in corporations and in board rooms
and elsewhere
I have observed (perfectly honest upstanding) people in
their roles as board members condone manipulation of
financial reports because it never occurs to them it is
lying—its just part of what it means to manage
Our language effectively disables the normal social
sanctions that would limit such behavior in board
rooms and among managers as they openly discuss how
to “manage earnings” 24
© Michael C. Jensen, 2008-2011. All Rights Reserved
Electronic copy available at: [Link]
For Corporate Governance: Put
Integrity Back in the System
Boards have to take accountability for integrity of
the entire corporate system:
Executive compensation--
This starts with the budget/target-based
comp. systems most companies use
Backdating of Options
Another good place to look is to eliminate the
undiscussables in the board room
No system in which there are issues that are
undiscussable can be whole and complete
Therefore workability is sacrificed.
And it is undiscussable that there are
undiscussables 25
© Michael C. Jensen, 2008-2011. All Rights Reserved
Electronic copy available at: [Link]
For the Governance of Financial Firms:
Put Integrity Back in Your Operations
And this includes those professional firms
who serve both the supply and demand side of
financial services
Law firms, Banks, Investment Banks,
Brokerage Firms, Accounting Firms,
Consulting Firms (especially compensation
consultants)
Other financial service firms including
Mutual Funds, Hedge Funds, Private Equity
Funds, all of which have experienced
damage from lack of integrity -- and more
to come. 26
© Michael C. Jensen, 2008-2011. All Rights Reserved
Electronic copy available at: [Link]
 Some Clues to Out of Integrity
Behavior in Organizations
Everyone else is doing it.
We’ve always done it. This is the way
this business works.
If we don’t do it, somebody else will.
Nobody’s hurt by it.
It doesn’t matter how it gets done, as
long as it gets done.
It works, so lets not ask too many
questions.
No one’s going to notice.
It’s legal, but . . .
It’s too expensive
Source: Peter Forstmoser, Integrity in Finance (speech given to Swiss Banking
27 Institute, 11-15-2006
© Michael C. Jensen, 2008-2011. All Rights Reserved
Electronic copy available at: [Link]
Why the general lack of integrity in
relations with capital markets?
Many reasons, but a major one is that markets
reward and punish managers in ways very
similar to those budget based systems that
“pay people to lie”--Under promise and Over
deliver
And have similar undesirable outcomes
Moreover, this lack of integrity reduces long-
term value
How can it persist if it destroys long run
value?

28
© Michael C. Jensen, 2008-2011. All Rights Reserved
Electronic copy available at: [Link]
 How Markets Reward and Punish Managers for
Meeting or Beating Consensus Forecasts

Source: Skinner & Sloan (2002) © Michael C. Jensen, 2008-2011. All Rights Reserved
Electronic copy available at: [Link]
 Typical Annual Bonus Plan
Cash
The "Incentive Zone"
Remuneration

Base Salary +
Bonus Cap

Base Salary +
Target Bonus Pay-Performance
Relation

Base Salary +
Threshold Bonus

Base Salary

0
50 Performance
Threshold Target Measure
Performance Performance
Source: Jensen, “Paying People to Lie: The
Truth About the Budgeting Process”, [Link] © Michael C. Jensen, 2008-2011. All Rights Reserved
Electronic copy available at: [Link]
Evidence from Survey of 401 CFO’s Reveals
Fundamental Lack of Integrity
Graham, Harvey & Rajgopal survey (“Economic
Implications of Corp. Fin. Reporting” [Link]
of 401 CFOs find:
78% of surveyed executives willing to knowingly
sacrifice value to smooth earnings
Recent scandals have made CFOs less willing to use
accounting manipulations to manage earnings, but
Perfectly willing to change the real operating decisions
of the firm to destroy long run value to support short
run earnings targets

31
© Michael C. Jensen, 2008-2011. All Rights Reserved
Electronic copy available at: [Link]
 Aggregate Evidence on the Manipulation of Earnings

Source: DeGorge, Patel and Zeckhauser (1999)

© Michael C. Jensen, 2008-2011. All Rights Reserved
Electronic copy available at: [Link]
And This Lying Extends to the
Reporting of Hedge Fund Returns
Hedge funds regularly smooth month to month
returns
Because being able to say: “we have only had X
months of negative returns” has a big impact on
attracting investors to the fund
Big advantage to reporting a return of +.01%
rather than -.01%
Distribution of “hard to value” hedge fund
returns shows way too many just above zero and
way to few just below zero.
See Pool, Bollen, Nicolas P.B., "Do Hedge Fund Managers Misreport
Returns? Evidence from the Pooled Distribution" (2007) and Abdulali, “The
Bias Ratio™: Measuring the Shape of Fraud” (undated).

33
© Michael C. Jensen, 2008-2011. All Rights Reserved
Electronic copy available at: [Link]
And This Lying Extends to the
Reporting of Hedge Fund Returns
(Continued)

Contractual features of hedge funds provide them strong incentives to

inflate returns in December of each year and they do so.
They earn incentive fees if they beat their contractual benchmarks
and better performance increases investor contributions to the fund.
Agarwal, Daniel and Naik, "Why is Santa so Kind to Hedge Funds? The
December Return Puzzle!" (2007). provide strong evidence documenting this
phenomenon.
“. . . the results are striking, as the average December return is more than
two-and-a-half times the average return during the January–November
period (2.51% compared to 0.96%)”
“Hedge funds whose payments to fund managers depend on beating
a benchmark return earn 50% of their total returns for the year in
the month of December.”
In the authors’ words hedge funds accomplish this
“. . . by under-reporting returns earlier in the year and/or by
borrowing from January returns in the following year”
And once this lying and manipulation starts it is almost impossible to
stop in times of crisis. 34
© Michael C. Jensen, 2008-2011. All Rights Reserved
Electronic copy available at: [Link]
And Does This Lying Extend to the
Reporting of Analyst Recommendations?
Ljungqvist, Malloy, and Marston (2007) in their paper "Rewriting
History" conclude:
“Comparing two snapshots of the entire historical I/B/E/S database of
research analyst stock recommendations, taken in 2002 and 2004 but
each covering the same time period 1993-2002, we identify tens of
thousands of changes which collectively call into question the principle
of replicability of empirical research. The changes are of four types: 1)
The non-random removal of 19,904 analyst names from historic
recommendations (“anonymizations”); 2) the addition of 19,204 new
records that were not previously part of the database; 3) the removal of
4,923 records that had been in the data; and 4) alterations to 10,698
historical recommendation levels. In total, we document 54,729 ex post
changes to a database originally containing 280,463 observations.”
“As of February 2007, Thomson Financial’s position is that “changes to
Recommendation History have occurred as part of necessary processes
and maintenance.” Previously, Thomson had indicated that the
anonymizations were the result of three software glitches. The first
produced incorrect start and end dates for some analysts’ employment
histories. The second caused selective ticker histories for certain analysts
to be anonymized, in connection with attempts to consolidate duplicate
analyst identifiers. The third, which can still occur, results in
recommendations being attributed to an analyst who has departed;
subsequent corrections involve anonymizing
35
such recommendations.”
© Michael C. Jensen, 2008-2011. All Rights Reserved
Electronic copy available at: [Link]
And Does This Lying Extend to the
Reporting of Analyst Recommendations?
(Continued)
Ljungqvist, Malloy, and Marston (2007) continue:
“At the recommendation level, the collective effect of the changes is to
make the overall distribution of historic recommendations issued for U.S.
companies between October 1993 and July 2002 appear more
conservative in 2004 than it did in 2002, with considerably fewer strong
buys and buys and more holds, sells, and strong sells.”
“Broker-level [data], which can be used to predict the profitability of
stock recommendations (Barber et al. (2006)), change even more
dramatically. One reason why these findings are important is that the
apparently optimistic bias in the historical distribution of
recommendations was a frequently cited impetus to the regulatory
proceedings that culminated in the Global Research Analyst Settlement
of 2003 between New York attorney general Eliot Spitzer, the SEC,
NASD, NYSE, North American Securities Administrators Association,
state regulators, and twelve brokerage firms.”

36
© Michael C. Jensen, 2008-2011. All Rights Reserved
Electronic copy available at: [Link]
And Does This Lying Extend to the
Reporting of Analyst Recommendations?
(Continued)
Ljungqvist, Malloy, and Marston (2007) continue:
“Similarly, the changes impact the implementation of popular trading
strategies based on analyst consensus recommendations. . . A simple
trading strategy that buys stocks in the top consensus change quintile
and shorts stocks in the lowest quintile each month performs 15.9% to
42.4% better on the 2004 tape than on the 2002 tape, suggesting that
the changes to the I/B/E/S database have resulted in the appearance of
more profitable analyst research.”

37
© Michael C. Jensen, 2008-2011. All Rights Reserved
Electronic copy available at: [Link]
And Does This Lying Extend to the
Reporting of Analyst Recommendations?
(Continued)
Ljungqvist, Malloy, and Marston (2007) continue:
“Track records of individual analysts are also affected. . . Among the group of
analysts with anonymized recommendations, we find that abnormal returns
following subsequently anonymized upgrades-to-buy are significantly lower than
are abnormal returns following upgrades by the same analysts that remained
untouched. The return differential is large, ranging from 3.6% to 4.0% p.a. over the
1993-2002 period. It is even larger in the most recent, post-bubble period (as high
as 7.4% p.a.), and for the sub-sample of bolder recommendations (5.2% and 9.1%
p.a. in the full-sample and post-bubble periods, respectively).”
“Analysts whose track records are affected are associated with more favorable
career outcomes over the 2003-2005 period than their track records and abilities
would otherwise warrant. Following the career path modeling in Hong, Kubik, and
Solomon (2000) closely, we find that analysts associated with anonymizations
experience a more than 60% increase in the likelihood of subsequently moving
from a low-status to a high-status brokerage firm. This effect is much larger than
any other in our career outcome models. The magnitude of the effect of additions
on career outcomes is also large, boosting the likelihood by more than 40%.
Similarly, analysts are more likely to be rated the top stock picker in their sectors
by the Wall Street Journal, which relies on Thomson Financial data, if some of their
recommendations have been dropped or added.
Collectively, our findings raise serious doubts about the replicability of past,
current, and future studies using the I/B/E/S historical recommendations database.”
38
© Michael C. Jensen, 2008-2011. All Rights Reserved
Electronic copy available at: [Link]
And Does This Lying Extend to the
Reporting of Analyst Recommendations?
(Continued)
Ljungqvist, Malloy, and Marston (2007) continue:
“Track records of individual analysts are also affected. . . Among the group of
analysts with anonymized recommendations, we find that abnormal returns
following subsequently anonymized upgrades-to-buy are significantly lower than
are abnormal returns following upgrades by the same analysts that remained
untouched. The return differential is large, ranging from 3.6% to 4.0% p.a. over the
1993-2002 period. It is even larger in the most recent, post-bubble period (as high
as 7.4% p.a.), and for the sub-sample of bolder recommendations (5.2% and 9.1%
p.a. in the full-sample and post-bubble periods, respectively).”
“Analysts whose track records are affected are associated with more favorable
career outcomes over the 2003-2005 period than their track records and abilities
would otherwise warrant. Following the career path modeling in Hong, Kubik, and
Solomon (2000) closely, we find that analysts associated with anonymizations
experience a more than 60% increase in the likelihood of subsequently moving
from a low-status to a high-status brokerage firm. This effect is much larger than
any other in our career outcome models. The magnitude of the effect of additions
on career outcomes is also large, boosting the likelihood by more than 40%.
Similarly, analysts are more likely to be rated the top stock picker in their sectors
by the Wall Street Journal, which relies on Thomson Financial data, if some of their
recommendations have been dropped or added.
Collectively, our findings raise serious doubts about the replicability of past,
current, and future studies using the I/B/E/S historical recommendations database.”
39
© Michael C. Jensen, 2008-2011. All Rights Reserved
Electronic copy available at: [Link]
Collusion Between
Analysts and Firms?
Hutton’s (2004) study of firm audits of analysts’ spreadsheet
earnings models result in the following:
Of 421 firms responding to NIRI 2001 survey, 85.5%
reviewed analysts models (= guidance firms)
Those analysts showed more accurate forecasts in the sense
of lower mean squared errors
But, forecasts become systematically downward biased
therefore yielding systematic (+) earnings surprises
Analysts of the no-guidance firms walk down their estimated
earnings in response to negative earnings surprises (47% with
3 to 4 quarters with (–) earnings news) during the year.
However, analysts of the guidance firms walk down their
earnings estimates even though 49% of the firms have 3 to 4
quarters of positive earnings news. Gives management a year
end boost and indicates beginning of year bias
40
© Michael C. Jensen, 2008-2011. All Rights Reserved
Electronic copy available at: [Link]
More Evidence on the problems
. Percentage of Firms Meeting or Beating Analyst Forecasts
.75
Proportion Meeting Earnings Expectations

.7

.65
.6

.55
.5

.45

.4

.35
.3

.25
85

87

89

91

93

95

97
19

19

19

19

19

19

19
Year
Source: Matsumoto (2002)

41
© Michael C. Jensen, 2008-2011. All Rights Reserved
Electronic copy available at: [Link]
The Managing Earnings Game Seems To
Have Emerged Strongly in Mid 1990’s

Bartov, Givoly and Hayn (2002) find:

Proportion of earnings surprises at end of quarter
(-) fall from 48% to 31 % from 1983-93 to 1994-97
(+) increase from 40% to 50%
(0) increase from 12% to 19%
Upward bias in 1 quarter ahead forecast has increased
3% premium return for Meeting or Beating Analyst
forecast at end of quarter
Small penalty for neg. revisions of forecast during qtr.
How did analysts miss Microsoft’s earnings for 47
quarters?

42
© Michael C. Jensen, 2008-2011. All Rights Reserved
Electronic copy available at: [Link]
The Peculiar Equilibrium between
Analysts and Firms
Analysts long-run forecasts are systematically
biased high
These forecasts are then “walked down” so
that at the realization date they are
systematically low
Investors appear to get taken (fooled) in both
cases.
Appears to be caused by analysts colluding
with managers to allow them to meet or beat
forecasts at the end of quarter.
But it seems impossible for effective
collusion to take place amongst so many
players.
43
© Michael C. Jensen, 2008-2011. All Rights Reserved
Electronic copy available at: [Link]
 Analysts issue optimistic earnings forecasts and then “walk down”
these estimates to a level firms can beat at the official earnings
announcement
0.008
(Forecast - Actual Earnings)/Price
0.007

0.006

0.005

0.004

0.003

0.002

0.001

0.000

-0.001 -11 -10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0

Months relative to actual earnings announcement

The figure is based on aggregate 1984-2001 data from Richardson, Teoh, and Wysocki (2004) (provided by the authors), and shows the
median difference of the forecast earnings per share and actual earnings per share, scaled by the prior-year share price The sample consists
of all individual analyst forecasts for firms with data on both I/B/E/S and Compustat, and shows that the median consensus analysis forecast
is initially positively biased, but that analysts “walk down” these forecasts each month. By the month of the actual earnings announcement,
the median consensus forecast is negatively (and statistically significantly) biased; that is, the median company reports earnings slightly
exceeding the year-end analyst forecast.

© Michael C. Jensen, 2008-2011. All Rights Reserved

Electronic copy available at: [Link]
Walk Down Results from Mgmt.
Pressure & Analyst Self Selection
Suppose Mgmt. imposes costs on analysts who are
pessimistic or not optimistic “enough”
Suppose to avoid such costs analysts opt out of reporting
their bad news on companies (w/o announcing why they
opt out), or drop coverage entirely.
Evidence: Analysts seldom issue sell recommendations
and often delay downgrades of a firm (Hong and Stein)
Resulting consensus forecast is then biased upward, and
the process is out of integrity. (McNichols & Obrien (1997))
“Analysts’ long run EPS forecasts are systematically
overoptimistic for growth firms, and . . . [this] is
systematically related to the inferior stock price
performance of growth firms” Skinner & Sloan (2002). See
also La Porta (1996) and Dechow and Sloan (1997)
45
© Michael C. Jensen, 2008-2011. All Rights Reserved
Electronic copy available at: [Link]
More Data Indicating
Earnings Lies (continued)
Marquardt and Wiedman (2002) find that
managers use accruals to manage earnings
either up or down in situations to fit their own
interests:
At times of equity issues firms use accruals
to increase earnings and therefore stock
price
In Management buyout situations firms use
accruals to decrease earnings and therefore
stock price

46
© Michael C. Jensen, 2008-2011. All Rights Reserved
Electronic copy available at: [Link]
More Evidence that both Managers
and Analysts Manipulate Earnings
The frequency of small quarterly profits is unusually
large and the frequency of small losses is unusually
small. And so too for small increases and decreases in
profits. Burgstahler and Dichev (1997)
Managers’ change real operating decisions such as
reducing research and development or advertising
expenditures to meet benchmarks. Dechow and Sloan,
1991; Bushee, 1998; Graham, Harvey, and Rajgopal,
2005; Rowchowdhury, 2004
Managers’ manipulate earnings upward around new
equity offerings. Teoh, Welch & Wong (1998), and
Rangan (1998), Darrough & Rangan (2005)
Systematically overly optimistic analyst long term
growth forecasts around equity offerings are
associated with the largest post IPO under
performance. Rajan & Servaes (1997)
47
© Michael C. Jensen, 2008-2011. All Rights Reserved
Electronic copy available at: [Link]
More Data Indicating
Earnings Mgmt. (Lies)
Myers, Myers and Skinner (2005) find huge numbers of
firms with consecutive strings of quarterly EPS non-
decreases relative to the expected number.
They “find evidence consistent with the idea that
managers of sample firms take actions to (i) increase
reported EPS when EPS would otherwise decline, and
(ii) decrease reported EPS when EPS would otherwise
increase by more than necessary to record an increase”
Their evidence indicates this is done by strategically
reporting special items, strategically timing stock
repurchases, and exercising discretion over
accounting for taxes to smooth changes in EPS
“A total of 811 firms report earnings strings [non-
decreases in quarterly EPS] of at least 20 quarters while
the number of firms expected to be in the sample by
chance, given the number of firms on Compustat and a
probability of a non-decrease of .6, is only 2 firms.”

48
© Michael C. Jensen, 2008-2011. All Rights Reserved
Electronic copy available at: [Link]
What About the Current
Crisis in Financial Markets
It appears that just about every element in the
financial system people made mistakes and/or
lacked integrity
Home buyers
Congress (Community Reinvestment Act)
Mortgage Brokers and Loan Originators
Securitization: MBS and CDOs Deal
Arrangers (lawyers, and investment
bankers)
Agents in the chain got paid for writing/
securitizing mortgages, not mortgages
that would get paid. See also the
Goldman Sachs Abacus deal.
See [Link]
Rating Agencies
49
© Michael C. Jensen, 2008-2011. All Rights Reserved
Electronic copy available at: [Link]
What About the Current
Crisis in Financial Markets
It will take a non-trivial amount of time and research
to sort all this out.
Here is my conjecture:
We will find out that some of these problems were
caused by agency problems, conflicts of interest
between people/agents/principals.
However, we will miss half the story if we do not pay
attention to the conflicts of interest with ones self.
And that is the story about integrity
Why is it that almost everyone acts without
integrity in one way or another, despite the huge
costs it imposes on them?
50
© Michael C. Jensen, 2008-2011. All Rights Reserved
Electronic copy available at: [Link]
A Sobering Thought
Everyone in this room sees themselves as persons of
integrity.
The bad news:
I can say with great confidence that no one in this
room is a person completely in integrity –
including me.
That self-satisfied view is one of the causes of the
universal lack of integrity in the world. I repeat: the
common belief that we have “made it” is one of the
factors contributing to the lack of integrity.
The fact is that Integrity is a Mountain with no Top,
so we had better get used to (and even like) climbing.
51
© Michael C. Jensen, 2008-2011. All Rights Reserved
Electronic copy available at: [Link]
In Conclusion
I have outlined today an actionable pathway
to increasing integrity.
Integrity Matters
Not because it is virtuous
But because it creates workability
And Workability increases the opportunity
for performance, and maximum workability
is necessary for Maximum Value
Integrity thus becomes a Necessary (but
not sufficient) Condition for Value
Maximization and for a Great Life. Try it
and see. 52
© Michael C. Jensen, 2008-2011. All Rights Reserved
Electronic copy available at: [Link]
Notes:
A pdf file of these slides is available from the Social Science Research
Network at: [Link]

Some, but not all, of the contents of this speech are covered in the following
paper:

Werner Erhard, Michael Jensen, Steve Zaffron, “A New Model of

Integrity: Without Integrity Nothing Works”, unpublished paper in
process, 2007, [Link]

And in the last half of the following paper:

Jensen, Michael C., Murphy, Kevin J. and Wruck, Eric G.,

"Remuneration: Where We've Been, How We Got to Here, What are the
Problems, and How to Fix Them" (July 12, 2004). HBS NOM Paper No
04-28; ECGI - Finance Working Paper No. 44/2004.
[Link]

53
© Michael C. Jensen, 2008-2011. All Rights Reserved
Electronic copy available at: [Link]
Credits and References
I’d like to thank the members of the Barbados Group, especially Werner Erhard, Allan Scherr and Steve Zaffron, for
their contributions to my understanding of integrity and its importance.

Abdulali, Adil, undated. The Bias Ratio™: Measuring the Shape of Fraud (Protégé Partners, New York).
Agarwal, Vikas, Daniel, Naveen D. and Naik, Narayan Y., "Why is Santa so Kind to Hedge Funds? The December
Return Puzzle!" (March 29, 2007). Available at SSRN: [Link]
Aggarwal, Rajesh K., Laurie Krigman, and Kent L. Womack. 2002. "Strategic IP Underpricing, Information
Momentum, and Lockup Expiration Selling." Journal of Financial Economics, V. 66, No. 1: pp 105-137.
Bartov, Eli, Givoly, Dan and Hayn, Carla, "The Rewards to Meeting or Beating Earnings Expectations" (October 2000).
Available at SSRN: [Link]
Bodnaruk, Andriy, Massa, Massimo and Simonov, Andrei, "The Dark Role of Investment Banks in the Market for
Corporate Control" (December 2007). EFA 2007 Ljubljana Meetings Paper Available at SSRN: [Link]
abstract=966202
Bradshaw, Mark T., Scott A. Richardson, and Richard G. Sloan. 2005. "The Relation between Corporate Financing
Activities, Analysts' Forecasts and Stock Returns". In Journal of Accounting and Economics Conference, 2004.
Burgstahler, D., and I. Dichev. 1997. Earnings management to avoid earnings decreases and losses. Journal of
Accounting & Economics 24 (December): 99-126.
Bushee, Brian. 2004. "Identifying and Attracting the "Right" Investors: Evidence on the Behavior of Institutional
Investors." Journal of Applied Corporate Finance, V. 16, No. 4: Fall, pp. 28-35.
Clement, Michael B. 1999. "Analyst Forecast Accuracy: Do Ability, Resources, and Portfolio Complexity Matter?"
Journal of Accounting and Economics, V. 27, No. 3: pp 285-303.

54
© Michael C. Jensen, 2008-2011. All Rights Reserved
Electronic copy available at: [Link]
Credits and References (continued 2)
Cowen, Amanda, Groysberg, Boris and Healy, Paul M., "Which Types of Analyst Firms Make More
Optimistic Forecasts?" (July 8, 2003). Harvard NOM Working Paper No. 03-46. [Link]
abstract=436686
Darrough, Masako, and Rangan, Srinivasan, Do Insiders Manipulate Earnings When They Sell Their Shares
in an Initial Public Offering?, Journal of Accounting Research, Vol. 43 No. 1 March 2005, pp. 1-33.
Dechow, Patricia M., Hutton, Amy P. and Sloan, Richard G., "The Relation between Analysts' Forecasts of
Long-Term Earnings Growth and Stock Price Performance Following Equity Offerings" (June 1999). http://
[Link]/abstract=168488 DOI: 10.2139/ssrn.168488
Degeorge, François, Jayendu Patel and Richard Zeckhauser. 1999. "Earnings Management to Exceed
Thresholds." Journal of Business, V. 72, No. 1: pp. 1-33.
Fuller, Joseph and Jensen, Michael C., "Just Say No To Wall Street" . Journal of Applied Corporate Finance, Vol.
14, No. 4 (Winter 2002) pp. 41-46. [Link]
Graham, Harvey & Rajgopal survey “Economic Implications of Corp. Fin. Reporting” [Link]
abstract=491627
Hayn, C. 1995. The information content of losses. Journal of Accounting & Economics 20 (September): 125-153.
Hayward, Mathew L. A. and Warren Boeker. 1998. "Power and Conflicts of Interest in Professional Firms:
Evidence from Investment Banking." Administrative Science Quarterly, V. 43, No. 1 (Mar., 1998): pp 1-22.
Healy, Paul M. 1985. "The Effect of Bonus Schemes on Accounting Decisions." Journal of Accounting &
Economics, V. 7, No. 1-3: pp. 85-107.
Healy, Paul M., and Krishna Palepu.”Information Asymmetry, Corporate Disclosure and the Capital
Markets: A Review of the Empirical Disclosure Literature” (December 2000). JAE Rochester Conference
April 2000. [Link]
Healy, P. M., and J. M. Wahlen. 1999. A review of the earnings management literature and its implications
for standard setting. Accounting Horizons 13 (December): 365-383.

55
© Michael C. Jensen, 2008-2011. All Rights Reserved
Electronic copy available at: [Link]
Credits and References (continued 3)
Hong, Harrison and Jeffrey D. Kubik. 2003. "Analyzing the Analysts: Career Concerns and Biased Earnings
Forecasts." The Journal of Finance, V. 58, No. 1: pp 313-351. [Link]
Hutton (1999) The Relation Between Analysts’ Earnings Forecasts of Long-Term Earnings Growth and
Stock Price Performance Following Equity Offerings [Link]
Hutton, Amy, 2004. Determinants of Managerial Earnings Guidance Prior to Regulation Fair Disclosure and
Bias in Analysts Earnings Forcasts, [Link]
Hutton, Amy. 2004. "Beyond Financial Reporting — An Integrated Approach to Disclosure." Journal of
Applied Corporate Finance, V. 16, No. 4: Fall, pp. 8-16.
Hutton, Amy, and James Weber, 2001, Progressive Insurance: Disclosure Strategy, Harvard Business School
Case, 9-102-012, December 12.
Jacob, John, Thomas Z. Lys, and Margaret A. Neale. 1999. "Experience in Forecasting Performance of
Security Analysts." Journal of Accounting and Economics, V. 28: pp 51-82.
Jensen, Michael C., "Paying People to Lie: The Truth About the Budgeting Process" (Revised September,
2001). Harvard NOM Research Paper No. 01-03, and HBS Working Paper No. 01-072, European Financial
Management, Vol. 9, pp. 379-406, September 2003 [Link]
Jensen, Michael C., "Agency Costs of Overvalued Equity" (March 2005). Harvard NOM Working Paper No.
04-26; ECGI - Finance Working Paper No. 39/2004, Financial Management, V. 34, No 1, Spring 2005. http://
[Link]/abstract=480421
Jensen, Michael C., "The Agency Cost of Overvalued Equity and the Current State of Corporate Finance" .
Harvard NOM Working Paper No. 04-29, European Financial Management, Vol. 10, pp. 549-565, December
2004 [Link]

56
© Michael C. Jensen, 2008-2011. All Rights Reserved
Electronic copy available at: [Link]
Credits and References (continued 4)

Kothari, S. P, Elena Loutskina, and Valeri Nikolaev. 2005. "Agency Theory of Overvalued Equity as an
Explanation for the Accrual Anomaly", (December 22, 2005). [Link]
Lin, Hsiou-wei and Maureen F. McNichols. 1998. "Analyst Coverage of Initial Public Offerings": Stanford
University. Unpublished manuscript.
Lin, Hsiou-wei and Maureen F. McNichols. 1998. "Underwriting Relationships, Analysts' Earnings Forecasts
and Investment Recommendations." Journal of Accounting and Economics, V. 25, No. 1: pp 101-127.
Lin, Hsiou-wei, Maureen F. McNichols, and Patricia C. O'Brien. 2003. "Analyst Impartiality and
Investment Banking Relationships": National Taiwan University, Stanford University, and University of
Waterloo. Unpublished Manuscript.
Ljungqvist, Alexander, Malloy, Christopher J. and Marston, Felicia C., "Rewriting History" (February 20,
2007). AFA 2007 Chicago Meetings Paper Available at SSRN: [Link]
Marquardt, Carol and Wiedman, Christine I., "How are Earnings Managed? An Examination of Specific
Accruals" (December 2002). [Link]
Matsumoto, Dawn A. 2002. "Management's Incentives to Avoid Negative Earnings Surprises." Accounting
Review, V. 77, No. 3: pp. 483-514.
Michaely, R., and K. L. Womack, 1999, “Conflicts of Interest and the Credibility of Underwriter Analyst
Recommendations,” Review of Accounting Studies, V. 12: pp. 653-686.

57
© Michael C. Jensen, 2008-2011. All Rights Reserved
Electronic copy available at: [Link]
Credits and References (continued 5)

Myers, James N., Myers, Linda A. and Skinner, Douglas J., "Earnings Momentum and Earnings
Management" (April 2005).[Link] DOI: 10.2139/ssrn.741244
O'Brien, Patricia C. 1990. "Forecast Accuracy of Individual Analysts in Nine Industries." Journal of
Accounting Research, V. 28, No. 2 (Autumn 1990): pp 286-304.
Pool, Veronika Krepely and Bollen, Nicolas P.B., "Do Hedge Fund Managers Misreport Returns? Evidence
from the Pooled Distribution" (November 19, 2007). Available at SSRN: [Link]
Rajan, Raghuram and Henri Servaes. 1997. "Analyst Following of Initial Public Offerings." Journal of
Finance, V. 52, No. 2: pp 507-529.
Rangan, S. 1998. Earnings management and the performance of seasoned equity off[Link] of Financial
Economics 50: 101-22.
Richardson, Scott, Siew Hong Teoh and Peter Wysocki. 2004. "The Walk-down to Beatable Analyst
Forecasts: The Role of Equity Issuance and Insider Trading Incentives." Contemporary Accounting
Research, V. 21, No. 4: Winter, pp. 885-924.
Stewart, Bennett. 2004. "Making Financial Goals and Reporting Policies Serve Corporate Strategy: The
Case of Progressive Insurance. An Interview with Tom King, VP and Treasurer, Progressive Insurance."
Journal of Applied Corporate Finance, V. 16, No. 1: pp. 8-19.
Teoh, S., I. Welch, and T. Wong. 1998. Earnings management and the underperformance of seasoned equity
offerings. Journal of Financial Economics 50: 63-99.

58
© Michael C. Jensen, 2008-2011. All Rights Reserved
Electronic copy available at: [Link]