This paper provides a rational explanation for earnings discontinuity in the context of the agency model. A company manager often possesses private information about the project's expected return. This information is valuable to the firm because early warning that a project is unlikely to...

This paper develops a multiperiod principal-agent model in which a manager must be given incentives to undertake investments and to exert personally costly effort. Investments are soft (e.g., intangible assets) and therefore entail measurement errors for the accounting system as it seeks to...

Accounting measurements of firms' investments are usually imprecise. We study the economic consequences of such imprecision in a setting where accounting imprecision interacts with information asymmetry regarding the ex ante profitability of the project that is privately known by the firm's...

The use of fixed capital budgets is an empirically well-documented phenomenon in business practice. Whensoever some profitable investment opportunities cannot be realized, managers have to make investment decisions between mutually exclusive investment opportunities. In a multiperiod agency...

Firms comprise divisions that often differ with respect to the degree of asset tangibility. As the strength of borrowing constraints depends on the liquidation value of assets, these firms influence their debt capacity by allocating funds across divisions. We argue that a company whose capital...

This study examines how accounting quality relates to firm-level capital investment efficiency. Our first hypothesis is that higher quality accounting enhances investment efficiency by reducing information asymmetry between managers and outside suppliers of capital. Our second hypothesis is that...

Performance measures based on residual income are increasingly popular. The academic literature shows that residual income has important incentive properties when management bases investment decisions on the net present value (NPV) rule. My analysis focuses on the case in which investment...

This experimental study tests the effects on budgetary slack of two potential controls for opportunistic self-interest, reputation and ethics. I manipulate the level of information asymmetry between the subordinate and the superior regarding productive capability and measure the subordinate's...

This paper examines a multiperiod principal-agent model in which a divisional manager has superior information regarding the profitability of an investment project available to his division. The manager also contributes to the periodic operating cash flows of his division through personally...

We consider a setting where a firm delegates an investment decision and, subsequently, a sales decision to a privately informed manager. For both decisions corporate income taxes have real effects. We show that compensating the manager based on pre-tax residual income can ensure after-tax...