We study optimal compensation contracts that (i) are designed to address a joint moral hazard and adverse selection problem and that (ii) are based on performance measures which may be manipulated by the agent at a cost. In the model, a manager is privately informed about his productivity prior...

Empirical evidence suggests that firms often manipulate reported numbers to avoid debtcovenant violations. We study how a firm's ability to manipulate reports affects the terms ofits debt contracts and the resulting investment and manipulation decisions that the firm implements.Our model...