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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/27585
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| Title: | Limited-Liability Contracts with Earnings Management |
| Authors: | Ronen, Joshua |
| Keywords: | Limited liability
principal-agent game
report ma nipulation
unobservable -outcome contract
earnings management |
| Issue Date: | Nov-2000 |
| Series/Report no.: | Joshua Ronen-05 |
| Abstract: | Numerous principal-agent situations of interest to accounting involve
limited liability by the agent. We explore this issue when the outcome
is mutually observable (MOC) and when it is not and the contract is
based instead on the agent’s report (NCC). We find that when
outcome is not observable, the effect of limited liability depends on
the level of limited liability: when low – no effect; when medium
– the principal fine-tunes payments based on a post-outcome
imperfect public signal to compensate for the loss in flexibility caused
by the agent’s limited liability; when high – the
agent’s expected utility exceeds his reservation utility level and
the public signal’s use is limited. Next, we invoke the revelation
principle and examine an incentive compatible contract (RPC).
Interestingly, RPC coincides with MOC when the limited liability is low
and resembles NCC when limited liability is either medium or high. In
addition, the impact of limited liability on the demand for earnings
management is examined. |
| URI: | http://hdl.handle.net/2451/27585 |
| Appears in Collections: | Accounting Working Papers
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