Abstract

http://ssrn.com/abstract=465201
 
 

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An Equilibrium Model of Incentive Contracts in the Presence of
Information Manipulation


Eitan Goldman


Indiana University - Department of Finance

Steve L. Slezak


University of Cincinnati - Department of Finance - Real Estate

July 5, 2005

EFA 2004 Maastricht Meetings Paper No. 3206

Abstract:     
This paper develops an agency model in which stock-based compensation is a double-edged sword, inducing managers to exert productive effort but also inducing managers to divert valuable firm resources to misrepresent performance. We examine how the potential for manipulation affects the equilibrium level of pay-for-performance sensitivity and derive several new crosssectional implications that are consistent with recent empirical studies. In addition, we analyze the impact of recent regulatory changes contained in the Sarbanes-Oxley Act of 2002 and show that in some cases policies intended to increase firm value by reducing misrepresentation may actually reduce firm value or increase the upward bias in manipulated disclosures.

Number of Pages in PDF File: 39

Keywords: Fraud, earnings manipulation, optimal contract

JEL Classification: D82, G34, J33, K22, M41, M43

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Date posted: December 10, 2003  

Suggested Citation

Goldman, Eitan and Slezak, Steve L., An Equilibrium Model of Incentive Contracts in the Presence of Information Manipulation (July 5, 2005). EFA 2004 MAASTRICHT. Available at SSRN: http://ssrn.com/abstract=465201 or http://dx.doi.org/10.2139/ssrn.465201

Contact Information

Eitan Goldman (Contact Author)
Indiana University - Department of Finance ( email )
1309 E. 10th St.
Bloomington, IN 47405
United States
812-856-0749 (Phone)
Steve L. Slezak
University of Cincinnati - Department of Finance - Real Estate ( email )
College of Business Administration
Cincinnati, OH 45221
United States
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