This paper analyzes executive compensation in a setting where managers may take a costly action to manipulate corporate performance, and whether managers do so is stochastic. We show that an increase in the possibility of manipulation actually calls for executive pay to be more responsive to...

I investigate whether management earnings forecasts fully reflect the implications of accruals for future earnings. I find that managers overestimate accrual persistence in range forecasts but not in point forecasts and that managers' accrual-related forecast bias in range forecasts increases...

The paper investigates the optimal structure of executive compensation with the possibility of financial data manipulation. We characterize the optimal compensation contract analytically, and establish necessary and sufficient conditions for earnings management to occur. The model shows that the...

Numerous principal-agent situations of interest to accounting involve limited liability by the agent. We explore this issue when the outcome is mutually observable (MOC) and when it is not and the contract is based instead on the agent s report (NCC). We find that when outcome is not observable,...

This paper studies the optimal design of long-term executive pay plans when boards of directors use accounting information for investment decision-making and executives can take costly actions to manipulate this information. The model predicts that a shift to more convex executive pay plans,...

This paper examines how a firm’s employment policy, particularly employee cash profit-sharing plans, affects its financial reporting. We find that firms with employee cash profit-sharing programs are more likely to engage in downward earnings management to reduce labor costs, especially with...