The effects of imperfect auditing on managerial compensation

Angelo Baglioni and Luca Colombo

International Review of Economics & Finance, 2011, vol. 20, issue 4, 542-548

Abstract: We study the optimal shareholder-manager contract having the property to induce the manager to exert high effort and truthfully reveal firm performance. This contract design problem is solved under the assumption of imperfect auditing, either because of mistakes or because of collusion between managers and auditors. The imperfection of the audit technology is costless up to a threshold, beyond which it causes a distortion in the incentive compatible contract or even prevents its existence. This result may help explain the observed decline in the use of stock options, tracing it back to an unfocused activity or poor performance of auditors.

Keywords: Imperfect; auditing; Misreporting; Stock; options; Managerial; incentives (search for similar items in EconPapers)
Date: 2011
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S105905601000095X
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:20:y:2011:i:4:p:542-548

Access Statistics for this article

International Review of Economics & Finance is currently edited by H. Beladi and C. Chen

More articles in International Review of Economics & Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().