A Theory of Income Smoothing When Insiders Know More Than Outsiders

Viral Acharya and Bart M. Lambrecht

No 17696, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We consider a setting in which insiders have information about income that outside shareholders do not, but property rights ensure that outside shareholders can enforce a fair payout. To avoid intervention, insiders report income consistent with outsiders' expectations based on publicly available information rather than true income, resulting in an observed income and payout process that adjust partially and over time towards a target. Insiders under-invest in production and effort so as not to unduly raise outsiders' expectations about future income, a problem that is more severe the smaller is the inside ownership and results in an "outside equity Laffer curve". A disclosure environment with adequate quality of independent auditing mitigates the problem, implying that accounting quality can enhance investments, size of public stock markets and economic growth.

JEL-codes: D82 D92 G32 G35 M41 M42 O43 (search for similar items in EconPapers)
Date: 2011-12
New Economics Papers: this item is included in nep-cta
Note: CF LE
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Citations: View citations in EconPapers (1)

Published as Viral V. Acharya & Bart M. Lambrecht, 2015. "A Theory of Income Smoothing When Insiders Know More Than Outsiders," Review of Financial Studies, vol 28(9), pages 2534-2574.

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Related works:
Journal Article: A Theory of Income Smoothing When Insiders Know More Than Outsiders (2015)
Working Paper: A Theory of Income Smoothing When Insiders Know More Than Outsiders (2012)
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