Manipulation and Fraud with Staged Financing

Abstract

It has been argued that short-term financing has a drawback: managers must manipulate interim performance signals in order to keep funds flowing. In contrast, this paper finds that total (expected) manipulation across two rounds of short-term financing may be either greater than or lower than manipulation with long-term financing. Manipulation in the two rounds may either act as complements or substitutes, depending on whether one is looking forward or backward in time. Regulatory fraud prevention remedies have more power when directed at the first round behavior. Manipulation is nonmonotonic in both firm quality and leverage.