Compensation Contracts and Earnings Management
Speaker
Abstract
| We consider a moral-hazard principal-agent model where the agent must report information about the firm value to the capital market. If the agent is rewarded via equity-based pay, higher effort incentives lead to higher misreporting incentives. When determining managerial compensation the shareholders thus face a tradeoff between the provision of managerial effort incentives and the firm’s reputation in the capital market. If expected penalties for misreporting are low, only weak effort incentives can be provided. We then investigate whether firm-related penalties can put additional pressure on an agent who is rewarded via shares. We show that the answer is no. We conclude that the SOX reform was right in raising the individual penalties for managers rather than relying on self-enforcement via the forces of the capital market. |
| Contact information: |
| Paolo Perego |
| Anna Nöteberg |
