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Overstatement and rational market expectation

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  • Kwon, Illoong
  • Yeo, Eunjung

Abstract

When an agent overstates his/her true performance, a rational market can still correctly guess the true performance. This paper shows, however, that such rational market expectation and a profit-maximizing principal can exacerbate the lack of productive effort by the agent.

Suggested Citation

  • Kwon, Illoong & Yeo, Eunjung, 2009. "Overstatement and rational market expectation," Economics Letters, Elsevier, vol. 104(1), pages 9-12, July.
  • Handle: RePEc:eee:ecolet:v:104:y:2009:i:1:p:9-12
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    References listed on IDEAS

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    1. Bergstresser, Daniel & Philippon, Thomas, 2006. "CEO incentives and earnings management," Journal of Financial Economics, Elsevier, vol. 80(3), pages 511-529, June.
    2. Lacker, Jeffrey M & Weinberg, John A, 1989. "Optimal Contracts under Costly State Falsification," Journal of Political Economy, University of Chicago Press, vol. 97(6), pages 1345-1363, December.
    3. Keith J. Crocker & Joel Slemrod, 2007. "The economics of earnings manipulation and managerial compensation," RAND Journal of Economics, RAND Corporation, vol. 38(3), pages 698-713, September.
    4. Illoong Kwon & Katherine Guthrie & Jan Sokolowsky, 2008. "On the Objective of Corporate Boards: Theory and Evidence," Discussion Papers 08-08, University at Albany, SUNY, Department of Economics.
    5. Jeremy C. Stein, 1989. "Efficient Capital Markets, Inefficient Firms: A Model of Myopic Corporate Behavior," The Quarterly Journal of Economics, Oxford University Press, vol. 104(4), pages 655-669.
    6. Holmstrom, Bengt & Milgrom, Paul, 1991. "Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design," Journal of Law, Economics, and Organization, Oxford University Press, vol. 7(0), pages 24-52, Special I.
    7. Moran, John & Morgan, John, 2003. "Employee recruiting and the Lake Wobegon effect," Journal of Economic Behavior & Organization, Elsevier, vol. 50(2), pages 165-182, February.
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    Citations

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    Cited by:

    1. Illoong Kwon & Katherine Guthrie & Jan Sokolowsky, 2008. "On the Objective of Corporate Boards: Theory and Evidence," Discussion Papers 08-08, University at Albany, SUNY, Department of Economics.
    2. Siegert, Caspar, 2014. "Bonuses and managerial misbehaviour," European Economic Review, Elsevier, vol. 68(C), pages 93-105.
    3. Bo Sun, 2009. "Asset returns with earnings management," International Finance Discussion Papers 988, Board of Governors of the Federal Reserve System (U.S.).
    4. repec:kap:jbuset:v:146:y:2017:i:2:d:10.1007_s10551-015-2891-y is not listed on IDEAS
    5. Bo Sun, 2011. "Limited market participation and asset prices in the presence of earnings management," International Finance Discussion Papers 1019, Board of Governors of the Federal Reserve System (U.S.).

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