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Earnings Manipulation and Incentives in Firms

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  • Friebel, Guido
  • Guriev, Sergei

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 him/her 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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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4861.

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Date of creation: Jan 2005
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Handle: RePEc:cpr:ceprdp:4861

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

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References

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Citations

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Cited by:
  1. Andersson Fredrik, 2011. "Make-or-Buy Decisions and the Manipulability of Performance Measures," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 11(1), pages 1-30, December.
  2. Egorov, Georgy & Guriev, Sergei & Sonin, Konstantin, 2006. "Media Freedom, Bureaucratic Incentives and the Resource Curse," CEPR Discussion Papers 5748, C.E.P.R. Discussion Papers.
  3. Agliardi, Elettra & Andergassen, Rainer, 2009. "Last resort gambles, risky debt and liquidation policy," Review of Financial Economics, Elsevier, vol. 18(3), pages 142-155, August.

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