Valuation and Growth Rates Manipulation
42 Pages Posted: 21 Apr 2002
Date Written: February 6, 2002
Valuation requires the prediction of future growth rate of persistent earnings, which depend on past and present internal, unobservable, investment decisions. In this study, we investigate the "management" 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 manager's choice of efforts might yield a series of increasing expected growth rates, contrary to owners' preferences. Consequently, the extrapolation of expected future earnings of an owner-controlled firm should differ from that of a management-controlled firm.
Keywords: Valuation, moral hazard, growth rates, smoothing
JEL Classification: C7, D0, G0, G3, M4
Suggested Citation: Suggested Citation