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Earnings Manipulation and Risky Investment

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  • Wang, Hanqing

Abstract

This paper develops a formal model to study earnings manipulation. It analyzes the effects of real earnings auditor quality and at-risk incentive on management's earnings manipulation decision. It shows that the management has the incentive to smooth corporate earnings even when the employment contract is linear. It also demonstrates that adding the ability to manipulate earnings to the principal-agent model drastically changes the management's attitude towards risk. The management will become risk seeking in the company's earnings when cumulative earnings management in previous periods is high even if the management has a risk-averse utility function.

Suggested Citation

  • Wang, Hanqing, 2006. "Earnings Manipulation and Risky Investment," Working Paper Series 18940, Victoria University of Wellington, The New Zealand Institute for the Study of Competition and Regulation.
    • Handle: RePEc:vuw:vuwcsr:18940
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    File URL: https://ir.wgtn.ac.nz/handle/123456789/18940
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    References listed on IDEAS

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    1. Paul Oyer, 1998. "Fiscal Year Ends and Nonlinear Incentive Contracts: The Effect on Business Seasonality," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 113(1), pages 149-185.
    2. Shleifer, Andrei & Vishny, Robert W, 1997. "A Survey of Corporate Governance," Journal of Finance, American Finance Association, vol. 52(2), pages 737-783, June.
    3. Jensen, Michael C. & Meckling, William H., 2008. "Theory of the firm: managerial behavior, agency costs and ownership structure," RAE - Revista de Administração de Empresas, FGV-EAESP Escola de Administração de Empresas de São Paulo (Brazil), vol. 48(2), April.
    4. Tirole, Jean, 1986. "Hierarchies and Bureaucracies: On the Role of Collusion in Organizations," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 2(2), pages 181-214, Fall.
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