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of enforceability that inhibits an agent's ability to renege on the contract and a level of auditing that inhibits his … ability to conceal income. The dynamics of the optimal contract imply an endogenous lower bound on the lifetime utility and … consumption of an agent, strictly positive auditing at all points in the contract and positive enforcement only when the agent …
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We investigate the role of audit verification in the resolution process following debt covenant violations. Using two sets of proxies for demand—audit fees and the independence and diligence of audit committees—we find evidence that covenant violations result in a demand for differentially...
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