The Decreasing Reliability of Accounting Data for US Firms

12 Oct

This post is rather technical, but it indicates the corporations routinely cook their books and that the practice is very widespread.

While these time series don’t prove anything decisively, deviations from Benford’s law are compellingly correlated with known financial crises, bubbles, and fraud waves. And overall, the picture looks grim. Accounting data seem to be less and less related to the natural data-generating process that governs everything from rivers to molecules to cities. Since these data form the basis of most of our research in finance, Benford’s law casts serious doubt on the reliability of our results. And it’s just one more reason for investors to beware.

H/t Tyler Cowan, Marginal Revolution.

via Studies in Everyday Life: Benford’s Law and the Decreasing Reliability of Accounting Data for US Firms.

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