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http://hdl.handle.net/2451/27587
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| Title: | Demand for the Truth in Principal-Agent Relationships |
| Authors: | Ronen, Joshua
Yaari, Varda |
| Keywords: | Limited liability
Principal-agent contract
Report management
Revelation Principle |
| Issue Date: | Jul-2006 |
| Series/Report no.: | Joshua Ronen-07 |
| Abstract: | Consider the following puzzle: If earnings management is harmful to
shareholders, why don't they design contracts that induce managers to
reveal the truth? To answer this question, we model the
shareholders-manager relationship as a principal-agent game in which the
agent (the manager) alone observes the economic outcome. We show that
the limited liability of the agent, defined as the agent's feasible
minimum payment, might explain the demand for earnings management by the
principal. Specifically, when the limited-liability level is high (low),
a contract that induces earnings management may be less (more) costly
than a truth revealing contract. This finding offers a new explanation
of the demand for earnings management. |
| URI: | http://hdl.handle.net/2451/27587 |
| Appears in Collections: | Accounting Working Papers
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