Earnings Management and Measurement Error

In this paper I consider the impact of a noisy indicator regarding a manager's manipulative behavior on optimal effort incentives and the extent of earnings management. The analysis in this paper extends a twotask, single performance measure LEN model by including a binary random variable. I show that contracting on the noisy indicator variable is not always useful. More specifically, the principal uses the indicator variable to prevent earnings management only under conditions where manipulative behavior is not excessive. Thus, under conditions of excessive earnings management, accounting adjustments that yield a more congruent overall performance measure can be more effective than an appraisal of the existence ofearnings management to mitigate the earnings management problem.

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Year of publication:	2008-12-10
Authors:	Hofmann, Christian
Institutions:	Verband der Hochschullehrer für Betriebswirtschaft
Published in:	BuR - Business Research BuR ; Volume 1, Issue 2, December 2008, 149-163
Subject:	Agency-Theorie \| Leistungsmessung \| Asymmetrische Information \| asmmetric informatin

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Extent:	1024000 bytes 16 p. application/pdf
Type of publication:	Article
Language:	English
ISSN:	1866-8658
Classification:	Pay salaries and social benefits ; Individual Articles ; No country specification
Source:	USB Cologne (business full texts)