Capital structure and earnings manipulation
AbstractWe consider an optimal contract between an entrepreneur and an investor, where the entrepreneur is subject to a double-moral hazard problem (one being the choice of production effort and the other being earnings manipulation). Since the entrepreneur cannot entirely capture the results of his effort, investment is below the optimal level and production effort is socially inefficient. The opportunity to manipulate earnings protects the entrepreneur against the risk of a low payoff when production is unsuccessful. Ex ante, this provides an incentive for the entrepreneur to increase investment and improve effort.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Economics and Business.
Volume (Year): 62 (2010)
Issue (Month): 5 (September)
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Web page: http://www.elsevier.com/locate/jeconbus
Earnings manipulation Intertemporal substitution Design of securities Property rights Double-moral hazard;
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