Can Earnings Manipulation Create Value?

Miglo, Anton (2015) Can Earnings Manipulation Create Value? Economics, Management, and Financial Markets, 11 (1). pp. 21-40. ISSN 1842-3191


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We consider a long-term board of directors-CEO relationship, where the firm‟s performance depends on the CEO‟s productive effort and where the CEO can be involved in earnings manipulation (EM). An agency-based two-period model is built and analyzed. The CEO pay includes a bonus and stock options. CEO gets stock options if the short-term earnings achieve some threshold. If EM is costly, CEO overinvests in production effort that increases the probability of getting stock options. If EM is possible, CEO production effort is closer to socially optimal level. The opportunity to manipulate earnings protects the CEO against the risk of a low payoff when the results of production are below expectations. Optimal contract
trades-off social loss from EM and improved incentives for productive effort. In equilibrium some degree of EM can be optimal. We also find that EM should more frequently be observed among managers with low outside opportunities.

Item Type: Article
Date: 18 April 2015
Subjects: L100 Economics
N100 Business studies
N200 Management studies
N300 Finance
N400 Accounting
Divisions: Faculty of Business, Law and Social Sciences > Birmingham City Business School > Department of Accounting, Finance and Economics
Depositing User: Anton Miglo
Date Deposited: 03 Aug 2018 09:57
Last Modified: 03 Aug 2018 09:57

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