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

CentER Discussion Paper No. 2008-21

33 Pages Posted: 20 Feb 2008

See all articles by Anja De Waegenaere

Anja De Waegenaere

Tilburg University - Department of Econometrics & OR, Netspar, and CentER

J. Wielhouwer

Vrije Universiteit Amsterdam

Date Written: February 2008

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.

Keywords: managerial compensation, reporting flexibility

JEL Classification: D82, D86, M41

Suggested Citation

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

Anja M.B. De Waegenaere (Contact Author)

Tilburg University - Department of Econometrics & OR, Netspar, and CentER ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Jacco L. Wielhouwer

Vrije Universiteit Amsterdam ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands

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