Valuation and Growth Rates Manipulation
42 Pages Posted: 8 Oct 2008
Date Written: June 2002
Valuation requires the prediction of future growth rate of persistent earnings, whichdepend on past and present internal, unobservable, investment decisions. In this study, we investigate the â¬Smanagementâ¬? of the series of growth rates in a multi-period principal-agent model with a moral hazard problem between owners (the principal) and the manager (the agent). We find that the managerâ¬"s choice of efforts might yield a series of increasing expected growth rates, contrary to ownersâ¬" preferences. Consequently, the extrapolation ofexpected future earnings of an owner-controlled firm should differ from that of a management-controlled firm.
Keywords: Valuation, moral hazard, growth rates, smoothing
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