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Endogenous Compensation in a Firm with Disclosure and Moral Hazard


James C. Spindler


University of Texas School of Law; McCombs School of Business, University of Texas at Austin

October 1, 2009

USC CLEO Research Paper No. C09-20
USC Law Legal Studies Paper No. 09-41

Abstract:     
I model a firm where shareholders choose the manager's compensation in light of the manager's dual roles of exerting effort and making disclosures regarding the firm's value. Because of limited contracting ability and the divergence of short-term interest between shareholder and manager, shareholders may be unable to obtain their first-best choices of effort and disclosure policy; where agency costs are too large, shareholders will be unwilling to award performance-based compensation, which induces both effort and fraudulent reporting. The principal findings are (1) fraud and effort are positively correlated, and given a poor outcome fraud is more likely to obtain when effort is exerted in equilibrium, (2) the incidence of fraud-inducing compensation increases as agency costs decrease, and (3) reductions in agency costs actually increase the incidence of fraud when agency costs are high.

working papers series


Date posted: October 1, 2009 ; Last revised: February 29, 2012

Suggested Citation

Spindler, James C., Endogenous Compensation in a Firm with Disclosure and Moral Hazard (October 1, 2009). USC CLEO Research Paper No. C09-20; USC Law Legal Studies Paper No. 09-41. Available at SSRN: http://ssrn.com/abstract=1481300 or http://dx.doi.org/10.2139/ssrn.1481300

Contact Information

James C. Spindler (Contact Author)
University of Texas School of Law ( email )
727 East Dean Keeton Street
Austin, TX 78705
United States

McCombs School of Business, University of Texas at Austin ( email )
Austin, TX 78712
United States
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