11-09-2026
Businesses depend on credible information. Investors evaluate financial disclosures, customers compare product claims, and executives rely on reports to make strategic decisions. Yet when people or organizations have incentives to portray themselves favorably, the information they share may be less revealing than it appears.
In “Bounded Misreporting Costs,” Judson Caskey, professor of accounting at Purdue University’s Mitch Daniels School of Business, examines how the costs of misrepresentation affect communication. His research finds that even when exaggeration carries a penalty, limits on the maximum cost of lying can prevent high-performing organizations from distinguishing themselves clearly from competitors.
The findings offer an important lesson for business leaders and investors: Formal punishments for dishonesty are not enough to ensure transparency. The ability to credibly convey high value depends on the desire to convey accurate information even absent penalties. Otherwise, decision-makers may struggle to distinguish genuine excellence from inflated claims.
Caskey’s study examines a situation in which a sender communicates information about its underlying quality or performance to a receiver who uses that information to make a decision. The sender benefits when the receiver perceives it as being of higher quality, creating an incentive to exaggerate. The receiver, meanwhile, wants accurate information.
Misrepresentation carries costs, such as regulatory fines, legal consequences and reputational damage. These costs are limited, as is typical for nonviolent offenses. Importantly, the sender lacks intrinsic motivation to convey accurate information in the sense that, absent explicit misreporting penalties, the sender would prefer to be perceived as high as possible.
This dynamic is familiar in business. Companies want investors to view their prospects favorably, executives want boards to recognize their performance, and sellers want customers to believe their products are superior.
His central finding is that a finite maximum cost of misrepresentation prevents the highest-quality senders from fully distinguishing themselves through their claims alone. Instead, moderately high-value senders can clearly signal their value while the highest types of senders can credibly convey only that they belong to a high-quality group rather than revealing precisely where they stand.
The reason is strategic. Given limited penalties, lower-quality senders would mimic sufficiently high claims and render the claims not credible. The maximum misreporting penalty dictates just how high of a value can be conveyed without attracting mimicry by low-value senders.
When the maximum cost of misrepresentation is sufficiently low, communication collapses into two broad categories: those who make no informative disclosure and those who claim to belong to a high-quality group. In some settings, this occurs even when the underlying differences in quality have no upper limit.
These findings challenge a common assumption in research on voluntary disclosure: that the costs of lying can become arbitrarily large. Recognizing realistic limits on penalties changes how much information organizations can credibly convey.
The findings help explain why broad, favorable claims are common in business communications. Descriptions such as “industry leader,” “best in class” and “world-class performance” can sound impressive without establishing meaningful differences between competitors.
When organizations benefit from favorable perceptions but face bounded costs for exaggeration, broad claims can become strategically attractive. The research suggests that such ambitious corporates claims are vague rather than dishonest. Given the inherent limits on punishments for dishonesty, it reflects the inability to make credible statements that distinguish organizations with substantially different underlying qualities.
Increasing penalties for misrepresentation may help, but leaders should not assume harsher consequences alone will produce transparency. Caskey emphasizes the importance of disinterested intermediaries with direct access to underlying information and incentives tied to accuracy.
Financial statement auditors are one example. Independent product inspectors and third-party certifiers can play similar roles by checking claims against evidence. Organizations should invest in verification processes that go beyond reviewing what employees or business units report.
Broad claims make meaningful differences in performance difficult to assess. Managers evaluating suppliers, acquisitions or internal business units should request evidence that can be independently tested.
Instead of accepting a claim that a supplier offers industry-leading quality, for example, decision-makers can request documented defect rates, independent certifications or performance data measured against consistent standards. Executives should likewise require supporting evidence for claims about productivity, customer satisfaction and financial results.
When employees are rewarded primarily for presenting positive results, they may have incentives to emphasize favorable information or overstate achievements. Leaders should examine whether performance targets, promotion criteria and reporting practices encourage accurate communication or simply favorable perceptions.
Rewarding employees for identifying problems early, acknowledging uncertainty and presenting credible evidence can strengthen decision-making. Managers should also provide channels for raising concerns without fear of retaliation.
Caskey’s study is theoretical rather than an empirical evaluation of particular corporate policies. Nevertheless, it identifies a mechanism leaders should consider when designing disclosure requirements, incentives and oversight procedures.
The broader lesson is that transparency depends on more than requiring organizations to communicate or threatening consequences for dishonesty. It also depends on whether claims reveal meaningful differences in quality and whether independent parties can verify them.
For business leaders, the goal should be to build systems in which accurate information is more valuable than persuasive exaggeration. Independent verification, measurable standards and incentives aligned with truthful reporting can help organizations make better decisions and build trust with the people who depend on their disclosures.
