Capital structure and earnings manipulation

Miglo, A. (2010) Capital structure and earnings manipulation. Journal of Economics and Business, 62(5), pp. 367-382. (doi: 10.1016/j.jeconbus.2010.05.001)

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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 earnings manipulation). Since the entrepreneur cannot entirely capture the results of his effort, investment is below the optimal level and production effort is socially inefficient. The opportunity to manipulate earnings protects the entrepreneur against the risk of a low payoff when production is unsuccessful. Ex ante, this provides an incentive for the entrepreneur to increase investment and improve effort.

Item Type:Articles
Glasgow Author(s) Enlighten ID:Miglo, Dr Anton
Authors: Miglo, A.
College/School:College of Social Sciences > Adam Smith Business School > Accounting and Finance
Journal Name:Journal of Economics and Business
ISSN (Online):1879-1735
Published Online:26 May 2010

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