Capital structure and earnings manipulation

Miglo, A

Abstract

We consider an optimal contract between an entrepreneur and an investor, where the entrepreneur is subject to a double-moral hazard problem (one being the choice of production effort and the other being earnings manipulation). Since the entrepreneur cannot entirely capture the results of his effort, investment is below the optimal level and production effort is socially inefficient. The opportunity to manipulate earnings protects the entrepreneur against the risk of a low payoff when production is unsuccessful. Ex ante, this provides an incentive for the entrepreneur to increase investment and improve effort.

Citation

Miglo, A. (2010). Capital structure and earnings manipulation. Journal of Economics and Business, 62(5), 367-382. https://doi.org/10.1016/j.jeconbus.2010.05.001

• Journal Article Type: Article
• Acceptance Date: May 4, 2010
• Online Publication Date: May 26, 2010
• Publication Date: Sep 1, 2010
• Deposit Date: May 25, 2021
• Journal: Journal of Economics and Business
• Print ISSN: 0148-6195
• Publisher: Elsevier
• Volume: 62
• Issue: 5
• Pages: 367-382
• DOI: https://doi.org/10.1016/j.jeconbus.2010.05.001
• Publisher URL: https://doi.org/10.1016/j.jeconbus.2010.05.001
• Related Public URLs: http://www.journals.elsevier.com/journal-of-economics-and-business/
• Additional Information: Access Information : The Accepted Manuscript of this article is available to read Open Access at: http://www.open-access.bcu.ac.uk/6241/1/JEB%20complete.pdf