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Earnings Manipulation and Incentives in Firms

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Author Info
Friebel, Guido
Guriev, Sergei

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Abstract

We study the effect of earnings manipulation on incentives within the corporate hierarchy. When top management manipulates earnings, it must prevent information leakage from corporate insiders to the outside world. If an insider (e.g. a division manager) gains evidence about earnings manipulation, the threat to blow the whistle can provide them with an additional payment. We show that it is easier for division managers to prove top management’s manipulations when the performance of their own divisions is low. Earnings manipulation therefore undermines division managers’ incentives to exert effort and destroys value. We show that earnings manipulation is more likely to occur in flatter hierarchies; we also discuss implications of the auditing and whistle-blowing regulations of the Sarbanes Oxley Act.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4850.

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Date of creation: Jan 2005
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Handle: RePEc:cpr:ceprdp:4850

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Related research
Keywords: agency costs; flat hierarchies; Sarbanes Oxley Act; whistleblowing;

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Find related papers by JEL classification:
D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
G30 - Financial Economics - - Corporate Finance and Governance - - - General
M40 - Business Administration and Business Economics; Marketing; Accounting - - Accounting - - - General
M52 - Business Administration and Business Economics; Marketing; Accounting - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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