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Capital structure and earnings manipulation

  • Miglo, Anton

We consider an optimal contract between an entrepreneur and an investor, where the entrepreneur is subject to a double-moral hazard problem (one being the choice of production effort and the other being earnings manipulation). Since the entrepreneur cannot entirely capture the results of his effort, investment is below the optimal level and production effort is socially inefficient. The opportunity to manipulate earnings protects the entrepreneur against the risk of a low payoff when production is unsuccessful. Ex ante, this provides an incentive for the entrepreneur to increase investment and improve effort.

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Article provided by Elsevier in its journal Journal of Economics and Business.

Volume (Year): 62 (2010)
Issue (Month): 5 (September)
Pages: 367-382

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Handle: RePEc:eee:jebusi:v:62:y::i:5:p:367-382
Contact details of provider: Web page: http://www.elsevier.com/locate/jeconbus

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