Earnings Manipulation and Incentives in Firms

Guido Friebel and Sergei Guriev ()

No 4850, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We study the effect of earnings manipulation on incentives within the corporate hierarchy. When top management manipulates earnings, it must prevent information leakage from corporate insiders to the outside world. If an insider (e.g. a division manager) gains evidence about earnings manipulation, the threat to blow the whistle can provide them with an additional payment. We show that it is easier for division managers to prove top management’s manipulations when the performance of their own divisions is low. Earnings manipulation therefore undermines division managers’ incentives to exert effort and destroys value. We show that earnings manipulation is more likely to occur in flatter hierarchies; we also discuss implications of the auditing and whistle-blowing regulations of the Sarbanes Oxley Act.

Keywords: agency costs; flat hierarchies; Sarbanes Oxley Act; whistleblowing (search for similar items in EconPapers)
JEL-codes: D23 G30 M40 M52 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fin
Date: Written 2005-01
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Related works:
Working Paper: Earnings Manipulation and Incentives in Firms (2005)
Working Paper: Earnings Manipilation and Incentives in Firms (2005)
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