Valuation and Growth Rates Manipulation

Asian-Pacific Journal of Accounting and Economics, Vol. 9, No. 3, June 2002

Posted: 11 May 2002

See all articles by Arieh Gavious

Arieh Gavious

Ono Academic College; Ben-Gurion University

Joshua Ronen

New York University (NYU) - Department of Accounting

Varda Lewinstein Yaari

Multiple version iconThere are 3 versions of this paper

Abstract

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

Gavious, Arieh and Ronen, Joshua and Yaari, Varda Lewinstein, Valuation and Growth Rates Manipulation. Asian-Pacific Journal of Accounting and Economics, Vol. 9, No. 3, June 2002. Available at SSRN: https://ssrn.com/abstract=311560

Arieh Gavious

Ono Academic College ( email )

Kyriat Ono
Israel

Ben-Gurion University ( email )

Beer-Sheva 84105
Israel

Joshua Ronen (Contact Author)

New York University (NYU) - Department of Accounting ( email )

40 West 4th Street, Suite 400
Suite 10-180
New York, NY 10012-1118
United States
212-998-4144 (Phone)
212-995-4599 (Fax)

HOME PAGE: http://www.stern.nyu.edu/~jronen/

No contact information is available for Varda Lewinstein Yaari

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