This paper studies the effects of managerial optimism on the optimal design of debt covenants. We find that managers that are more optimistic about the future success of their investment ideas, provide lenders with greater control rights via tighter covenants. This is optimal for optimistic...

Accounting information provides guidance for real decisions such as whether to liquidate or continue an ongoing project. Ceteris paribus, implementing an accounting system with an aggressive bias leads to inefficient project continuations and causes a higher cost of capital. We show that an...

This paper examines the role of the financial reporting environment in selecting a new CEO from within versus outside the organization. We show that a CEO's ability to manipulate performance information renders it more difficult for the board to detect and replace poorly performing CEOs as well...

This paper studies a setting in which a risk-averse agent must be motivated to work on two tasks: evaluating a potential project and, if the project is adopted, implementing it. Although a performance measure that is informative of an agent's action is typically valuable because it can be used...