NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Economics of Earnings Manipulation and Managerial Compensation

Keith J. Crocker, Joel Slemrod

NBER Working Paper No. 12645
Issued in October 2006
NBER Program(s):   LS   CF

This paper examines managerial compensation in an environment where managers may take a hidden action that affects the actual earnings of the firm. When realized, these earnings constitute hidden information that is privately observed by the manager, who may expend resources to generate an inflated earnings report. We characterize the optimal managerial compensation contract in this setting, and demonstrate that contracts contingent on reported earnings cannot provide managers with the incentive both to maximize profits, and to report those profits honestly. As a result, some degree of earnings management must be tolerated as a necessary part of an efficient agreement.

download in pdf format
   (1417 K)

email paper

This paper is available as PDF (1417 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w12645

Published: Keith J. Crocker & Joel Slemrod, 2007. "The economics of earnings manipulation and managerial compensation," RAND Journal of Economics, RAND Corporation, vol. 38(3), pages 698-713, 09. citation courtesy of

Users who downloaded this paper also downloaded these:
Bergstresser, Desai, and Rauh w10543 Earnings Manipulation and Managerial Investment Decisions: Evidence from Sponsored Pension Plans
Crocker and Slemrod w10690 Corporate Tax Evasion with Agency Costs
Frydman and Jenter w16585 CEO Compensation
Bebchuk and Fried w9813 Executive Compensation as an Agency Problem
Kedia and Philippon w11573 The Economics of Fraudulent Accounting
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us