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Capital structure and earnings manipulation

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Author Info

  • Miglo, Anton

Abstract

We 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 Info

Article provided by Elsevier in its journal Journal of Economics and Business.

Volume (Year): 62 (2010)
Issue (Month): 5 (September)
Pages: 367-382

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Handle: RePEc:eee:jebusi:v:62:y::i:5:p:367-382

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Web page: http://www.elsevier.com/locate/jeconbus

Related research

Keywords: Earnings manipulation Intertemporal substitution Design of securities Property rights Double-moral hazard;

References

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  1. Titman, Sheridan & Wessels, Roberto, 1988. " The Determinants of Capital Structure Choice," Journal of Finance, American Finance Association, vol. 43(1), pages 1-19, March.
  2. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
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  4. Steven N. Kaplan & Per Strömberg, 2000. "Financial Contracting Theory Meets the Real World: An Empirical Analysis of Venture Capital Contracts," CRSP working papers 513, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  5. Degeorge, Francois & Patel, Jayendu & Zeckhauser, Richard, 1999. "Earnings Management to Exceed Thresholds," The Journal of Business, University of Chicago Press, vol. 72(1), pages 1-33, January.
  6. Rajan, Raghuram G & Zingales, Luigi, 1995. " What Do We Know about Capital Structure? Some Evidence from International Data," Journal of Finance, American Finance Association, vol. 50(5), pages 1421-60, December.
  7. Oliver D. Hart, 1987. "Incomplete Contracts and the Theory of the Firm," Working papers 448, Massachusetts Institute of Technology (MIT), Department of Economics.
  8. Hart, Oliver, 1995. "Firms, Contracts, and Financial Structure," OUP Catalogue, Oxford University Press, number 9780198288817.
  9. Jiraporn, Pornsit & Miller, Gary A. & Yoon, Soon Suk & Kim, Young S., 2008. "Is earnings management opportunistic or beneficial? An agency theory perspective," International Review of Financial Analysis, Elsevier, vol. 17(3), pages 622-634, June.
  10. Innes, Robert D., 1990. "Limited liability and incentive contracting with ex-ante action choices," Journal of Economic Theory, Elsevier, vol. 52(1), pages 45-67, October.
  11. John R. Graham & Campbell R. Harvey & Shiva Rajgopal, 2004. "The Economic Implications of Corporate Financial Reporting," NBER Working Papers 10550, National Bureau of Economic Research, Inc.
  12. Francesca Cornelli & Oved Yosha, 2003. "Stage Financing and the Role of Convertible Securities," Review of Economic Studies, Wiley Blackwell, vol. 70(1), pages 1-32, January.
  13. Burgstahler, David & Dichev, Ilia, 1997. "Earnings management to avoid earnings decreases and losses," Journal of Accounting and Economics, Elsevier, vol. 24(1), pages 99-126, December.
  14. Roychowdhury, Sugata, 2006. "Earnings management through real activities manipulation," Journal of Accounting and Economics, Elsevier, vol. 42(3), pages 335-370, December.
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Cited by:
  1. Miglo, Anton, 2014. "Timing of Earnings and Capital Structure," MPRA Paper 56547, University Library of Munich, Germany.
  2. Miglo, Anton, 2012. "Multi-stage investment, long-term asymmetric information and equity issues," MPRA Paper 46692, University Library of Munich, Germany.

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