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http://ssrn.com/abstract=1095676
 
 

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On the Effects of the Degree of Discretion in Reporting Managerial Performance


Anja De Waegenaere


Tilburg University - Center for Economic Research (CentER)

J. Wielhouwer


VU University Amsterdam

February 2008

CentER Discussion Paper No. 2008-21

Abstract:     
We consider a principal-agent setting in which a manager's compensation depends on a noisy performance signal, and the manager is granted the right to choose an (accounting) method to determine the value of the performance signal. We study the effect of the degree of such reporting discretion, measured by the number of acceptable methods, on the optimal contract, the expected cost of compensation and the manager's expected utility. We find that while an increase in reporting discretion never harms the manager, the effect on the expected cost of compensation is more subtle. We identify three main effects of increased reporting discretion and characterize the conditions under which the aggregate of these three effects will lead to a higher or lower cost of compensation.

Number of Pages in PDF File: 33

Keywords: managerial compensation, reporting flexibility

JEL Classification: D82, D86, M41

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Date posted: February 20, 2008  

Suggested Citation

De Waegenaere, Anja and Wielhouwer, J., On the Effects of the Degree of Discretion in Reporting Managerial Performance (February 2008). CentER Discussion Paper No. 2008-21. Available at SSRN: http://ssrn.com/abstract=1095676 or http://dx.doi.org/10.2139/ssrn.1095676

Contact Information

Anja M.B. De Waegenaere (Contact Author)
Tilburg University - Center for Economic Research (CentER) ( email )
P.O. Box 90153
Tilburg, 5000 LE
Netherlands
Jacco L. Wielhouwer
VU University Amsterdam ( email )
De Boelelaan 1105
Amsterdam, 1081HV
Netherlands
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