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Property rights and earnings manipulations

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Author Info

  • Anton Miglo

    ()
    (University of Guelph, Department of Economics.)

Abstract

This paper analyzes the links between cash flow rights, control rights and property rights in situations where a firm's security holders can manipulate earnings (intertemporal substitution). It is shown that the allocation of these rights a¤ects the incentives of claimholders when intertemporal substitution activities are numerous and cannot be contracted ex-ante. The main results we obtain are: 1) current cash flow rights and residual property rights are connected through the rule of marginal revenues; 2) the allocation of control rights does not necessarily coincide with the allocation of residual property rights; 3) when current cash flow rights are two-part linear, and in some cases when they are three-part linear, the problem of earnings manipulation can be eliminated through the appropriate design of property rights. However, for some contracts earnings manipulation is unavoidable. This theory provides new insights into the link between different rights of the holders of securities.

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Bibliographic Info

Paper provided by University of Guelph, Department of Economics and Finance in its series Working Papers with number 0612.

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Length: 25 pages
Date of creation: 2006
Date of revision:
Handle: RePEc:gue:guelph:2006-12

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Keywords: earnings manipulations; intertemporal substitution; design of securities; property rights; cash flow rights.;

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  1. Klaus M. Schmidt, 2003. "Convertible Securities and Venture Capital Finance," Journal of Finance, American Finance Association, vol. 58(3), pages 1139-1166, 06.
  2. Kaplan, Steven & Strömberg, Per Johan, 2000. "Financial Contracting Theory Meets The Real World: An Empirical Analysis Of Venture Capital Contracts," CEPR Discussion Papers 2421, C.E.P.R. Discussion Papers.
  3. Michael C. Jensen, 2003. "Paying People to Lie: the Truth about the Budgeting Process," European Financial Management, European Financial Management Association, vol. 9(3), pages 379-406.
  4. Zender, Jaime F, 1991. " Optimal Financial Instruments," Journal of Finance, American Finance Association, vol. 46(5), pages 1645-63, December.
  5. 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.
  6. Titman, Sheridan, 1984. "The effect of capital structure on a firm's liquidation decision," Journal of Financial Economics, Elsevier, vol. 13(1), pages 137-151, March.
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