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News management, moral hazard, and the properties of earnings, prices, and compensation

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  • Bonham, Jonathan

Abstract

I study theoretical properties of earnings, prices, and compensation by developing a dual moral hazard model in which a productive manager can selectively include verifiable information in an accounting report. When the cost of information is moderate, the solution exhibits several empirically-descriptive properties: market values exceed book values, the optimal earnings-based contract has a floor and a ceiling, the accounting system resembles historical cost with big bath write-downs but not write-ups, the Basu (1997) relation is conservative, the earnings distribution has a discontinuity, and the earnings–returns relation is S-shaped. These properties do not jointly emerge when the cost of information is low (high), in which case the accounting system resembles fair value (immediate expensing). I also show that the optimal earnings-based contract can always be replicated by a monotone price-based contract that may be implemented via performance shares.

Suggested Citation

  • Bonham, Jonathan, 2026. "News management, moral hazard, and the properties of earnings, prices, and compensation," Journal of Accounting and Economics, Elsevier, vol. 81(2).
    • Handle: RePEc:eee:jaecon:v:81:y:2026:i:2:s0165410125000710
    DOI: 10.1016/j.jacceco.2025.101835
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