Benford and the Internal Capital Market: A Useful Indicator of Managerial Engagement

Florian El Mouaaouy 1  und Jan Riepe 2
  • 1 Ludwig-Maximilians-Universität München,, Munich, Germany
  • 2 Eberhard-Karls University Tübingen,, Tübingen, Germany

Abstract

We propose the application of digit analysis using the Benford law to indicate managerial engagement in the capital allocation process. First, we motivate the potential of the Benford digit analysis to identify allocation outcomes that are shaped by human engagement instead of fixed decision rules. Second, we provide a case study to illustrate how the Benford digit analysis can be used to detect allocations affected by managerial interventions. We are unaware of any study applying the Benford test to internal capital markets, while this approach appears very useful in this context. It is commonly used in the auditing, financial accounting, and fraud detection literature.

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German Economic Review (GER), the official publication of the German Economic Association (Verein für Socialpolitik), is an international journal publishing original and rigorous research of general interest in a broad range of economic disciplines. The scope of research approaches includes theoretical, empirical and experimental work.

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