 Can earnings manipulation create value?No 803, Working Papers from University of Guelph, Department of Economics and Finance Abstract: Existing literature usually considers earnings manipulation to be a negative social phenomenon. We argue that earnings manipulation can be a part of the equilibrium relationships between firm's insiders and outsiders. We consider an optimal contract between an entrepreneur and an investor where the entrepreneur is subject to a double moral hazard problem (one being the choice of production effort and the other being intertemporal substitution, which consists of transferring cash flows between periods). Investment and production effort may be below socially optimal levels because the entrepreneur cannot entirely capture the results of his effort. The opportunity to manipulate earnings protects the entrepreneur against the risk of a low payoff when the results of production are low. Ex-ante, this provides an incentive for the entrepreneur to increase his level of effort and invest efficiently. Keywords: Earnings manipulation; intertemporal substitution; design of securities; property rights; moral hazard. (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:gue:guelph:2008-3 Access Statistics for this paper More papers in Working Papers from University of Guelph, Department of Economics and Finance Contact information at EDIRC. |
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