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Property rights and earnings manipulations

  • Anton Miglo

    ()

    (University of Guelph, Department of Economics.)

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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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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Web page: https://www.uoguelph.ca/economics/

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  1. Klaus Schmidt, 1999. "Convertible Securities and Venture Capital Finance," CESifo Working Paper Series 217, CESifo Group Munich.
  2. Steven N. Kaplan & Per Strömberg, 2000. "Financial Contracting Theory Meets the Real World: An Empirical Analysis of Venture Capital Contracts," CRSP working papers 513, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  3. Zender, Jaime F, 1991. " Optimal Financial Instruments," Journal of Finance, American Finance Association, vol. 46(5), pages 1645-63, December.
  4. 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.
  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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