The Economics of Earnings Manipulation and Managerial Compensation / Keith J. Crocker, Joel Slemrod.

Format:

Book

Author/Creator:

Crocker, Keith J.

Contributor:

National Bureau of Economic Research.

Slemrod, Joel.

Series:

Working Paper Series (National Bureau of Economic Research) no. w12645.

NBER working paper series no. w12645

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2006.

Summary:

This paper examines managerial compensation in an environment where managers may take a hidden action that affects the actual earnings of the firm. When realized, these earnings constitute hidden information that is privately observed by the manager, who may expend resources to generate an inflated earnings report. We characterize the optimal managerial compensation contract in this setting, and demonstrate that contracts contingent on reported earnings cannot provide managers with the incentive both to maximize profits, and to report those profits honestly. As a result, some degree of earnings management must be tolerated as a necessary part of an efficient agreement.

Notes:

Print version record

October 2006.