We present a two-period model in which the parties cannot commit to not renegotiate their contractual arrangement mid-game. This is of interest because, institutionally, can always agree and because this single friction sufficient induce endogenous performance measure manipulation. As well known (e.g., Dye [1988] Arya, Glover, Sunder [1998]), accounting manipulation type garbled communication between will be compelling phenomenon only when revelation representation possible.1 Such requires...

The seminal “unraveling” result in the disclosure literature posits that discretion inevitably leads to full disclosure, even when such has detrimental consequences. In this paper, we revisit optimal of proprietary information firms compete multiple markets. analysis demonstrates presence segments, unraveling applies at firmwide level but not necessarily segment by segment. Instead, firm an ex ante desire withhold and segments are sufficiently similar, post equilibrium entails aggregation...

The centralization versus decentralization choice is perhaps the quintessential organizational structure decision. In operations realm, this particularly critical when it comes to procurement function. Why firms may opt decentralize has been often studied and confirmed be a multifaceted choice. This paper complements existing studies by detailing trade-offs in decision light of firms' strategic use inventories influence supplier pricing. particular, we demonstrate that firm's cede choices...

We emphasize the role of accounting policies, and their audit, in an earnings management setting. use a two–period agency which three frictions interact: agent privately observes action (or effort) supply output, initial contract is subject to renegotiation. This creates setting both players’ behavior concern, and, importantly, information rationing efficient. Moreover, this directly interpretable as being produced by policy whose application ensured auditor.

ABSTRACT We analyze the optimal behavior of an organization when its employees can manipulate organization's accounting system to their private advantage. find that may benefit by helping system. This help reduce employees' returns from devoting effort further manipulation system, which reduces cost motivating devote improving real (rather than measured) performance organization.

We examine the interaction between discretionary and non-discretionary accruals in a stewardship setting. Contracting includes multiple rounds of renegotiation based on contractible accounting information non-contractible but more timely non-accounting information. show that regulation aimed at increasing earnings quality from valuation perspective (earnings persistence) may have significant impact how firms rationally respond terms allowing accrual discretion order to alleviate role...

ABSTRACT We derive the optimal compensation contract in a principal–agent setting which outcome is used to provide incentives for both effort and risky investments. To motivate investment, entails rewards high as well low outcomes, it increasing at mean effort. If rewarding outcomes infeasible, consisting of stocks options near‐efficient means overcoming manager's induced aversion undertaking investments, whereas stock not. However, plus option may induce excessively capping pay can be...

ABSTRACT Both soft, noncontractible, and hard, contractible, information are informative about managerial ability future firm performance. If a manager's compensation depends on expectations of or performance, then the manager has implicit incentives to affect information. We examine real incentive effects soft in dynamic agency with limited commitment. When long‐term contracts renegotiated, rewards for performance inherent allow principal partial control over incentives. This is because...

Regulatory oversight of capital markets has intensified in recent years, with a particular emphasis on expanding financial transparency. A notable instance is efforts by the Financial Accounting Standards Board that push firms to identify and report performance individual business units (segments). This paper seeks address short‐run long‐run consequences stringent enforcement uniform compliance these segment disclosure standards. To do so, we develop parsimonious model wherein regulatory...

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Abstract A common explanation for why firms incur sunk costs is that technology considerations make them inescapable. This paper shows sometimes may prefer to early (less informed) investment decisions even when allows such be delayed. Sunk commit and clarify a firm's future course of action prospective employees, thereby providing with incentives acquire firm-specific human capital. benefit also provide justification offering employee signing bonuses.

ABSTRACT In a standard financial economics model of asset pricing and value-maximizing firms, we show that better public information about firm-specific economy-wide events affects the allocation capital investments among firms over time. The consequences for market outcomes, such as risk, risk premia, interest rates, firm prices, cost capital, depend on investor preferences whether improvements are to or information. We rates premia tend move in opposite directions effects often dominate...

It has long been recognized that competitive considerations play a central role in corporate voluntary disclosure practices. Yet, the ways which competition and interact are sensitive to various factors, including both nature of information interactions. Cognizant this subtlety, we extend familiar model incorporate practical feature firms may not only hold private about consumer demand, but they can also influence demand by investments choose make. Such bolstering brand loyalty, product...

ABSTRACT Despite the obvious problems associated with collections, firms routinely sell on credit. Conventional wisdom suggests offering credit is a necessary evil when dealing insistent cash-constrained customers. This paper provides more positive view of trade We find that can enhance efficiency incentive contracts sales personnel. In effect, sale, client gets second chance to generate enough cash. The client's gives agent another opportunity demonstrate his past diligence firm. Moreover,...

In a multi-period model of optimal contracting and career concerns, we show long-term with renegotiation dominates short-term if there is non-contractible information. If the information not effectively contractible through contracts, labor market may play an important role in providing incentives world multiple sources several tasks.

We derive the optimal compensation contract in a principal-agent setting which outcome is used to provide incentives for both effort and risky investments. To motivate investment, entails rewards high as well low outcomes, it increasing at mean effort. If rewarding outcomes infeasible, consisting of stocks options near-efficient means overcoming manager's induced aversion against undertaking investments, whereas stock not. However, plus option may induce excessively capping pay can be...

We analyze the optimal behavior of an organization when its employees can manipulate organization's accounting system to their private advantage. find that may benefit by helping system. This help reduce employees' returns from devoting effort further manipulation system, which reduces cost motivating devote improving real (rather than measured) performance organization.

We analyze a setting where audit error depends on the ease with which an unaudited measure can be audited, e.g., cash flow versus accrual-based income, and demonstrate that optimal rate may substantially above zero. Though counter-intuitive, this conclusion follows from fact is easily audited provide relatively less of information critical for planning, control valuation.