The economics of earnings manipulation and managerial compensation
AbstractThis paper examines managerial compensation in an environment where managers may take a hidden action that affects the actual earnings of the firm. When realized, these earnings constitute hidden information that is privately observed by the manager, who may expend resources to generate an inflated earnings report. We characterize the optimal managerial compensation contract in this setting, and demonstrate that contracts contingent on reported earnings cannot provide managers with the incentive both to maximize profits, and to report those profits honestly. As a result, some degree of earnings management must be tolerated as a necessary part of an efficient agreement.
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Bibliographic InfoArticle provided by RAND Corporation in its journal RAND Journal of Economics.
Volume (Year): 38 (2007)
Issue (Month): 3 (09)
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Other versions of this item:
- Keith J. Crocker & Joel Slemrod, 2006. "The Economics of Earnings Manipulation and Managerial Compensation," NBER Working Papers 12645, National Bureau of Economic Research, Inc.
- A12 - General Economics and Teaching - - General Economics - - - Relation of Economics to Other Disciplines
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