Valuation and Growth Rates Manipulation
Asian-Pacific Journal of Accounting and Economics, Vol. 9, No. 3, June 2002
Posted: 11 May 2002
There is a growing analytical body of research on artificial smoothing - the manipulation of accounting numbers through accounting cosmetics. However, firms also can manipulate earnings through production-investment decisions real smoothing; the latter topic received little attention. In this study, we compare the temporal path of investment of an owners-controlled firm with that of a management-controlled firm. Specifically, the management-controlled firm is modeled as a multi-period principal-agent model wherein the management (agent) takes unobservable effort that affects investment stochastically. We find that the manager prefers to defer expending effort because future effort is discounted, while owners prefer him to exert more effort early on to reap its favorable benefits on the firm's value. Consequently, the manager's choice of efforts might yield a series of increasing expected growth rates, contrary to owners preferences, which implies that the extrapolation of expected future earnings of an owner-controlled firm exhibits strict concavity while the extrapolation of expected future earnings of a management-controlled firm exhibits strict convexity (on the average).
Note: This is a description of the paper and not the actual abstract.
Keywords: Valuation, moral hazard, growth rates, smoothing
JEL Classification: C7, D0, G0, G3, M4
Suggested Citation: Suggested Citation