This paper studies the role of conservative accounting standards in alleviating rational yet dysfunctional unobservable earnings manipulation. We show that when accounting numbers serve both the valuation role (in which potential investors use accounting reports to assess a firm's expected...

In this paper, we study a setting where a firm (principal) is privately informed of the firm's potential and contracts with an agent to supply unobservable effort. We show it can be optimal for the firm to have loose monitoring in the sense that the monitoring system is less perfect than what is...

This paper studies the role of observable accounting biases in alleviating rational yet dysfunctional unobservable earnings manipulation. We regard accounting numbers as serving two important roles: the valuation role in which potential investors use accounting reports to assess a firm's...