This paper provides a rational explanation for earnings discontinuity in the context of the agency model. A company manager often possesses private information about the project's expected return. This information is valuable to the firm because early warning that a project is unlikely to...

This paper examines a multiperiod principal-agent model in which a divisional manager has superior information regarding the profitability of an investment project available to his division. The manager also contributes to the periodic operating cash flows of his division through personally...

We consider a setting where a firm delegates an investment decision and, subsequently, a sales decision to a privately informed manager. For both decisions corporate income taxes have real effects. We show that compensating the manager based on pre-tax residual income can ensure after-tax...

This paper examines a multiperiod principal-agent model in which a divisional manager has superior information regarding the profitability of an investment project available to his division. The manager also contributes to the periodic operating cash flows of his division through personally...

We use a sample of U.S. dual-class companies to examine how the divergence between insider control rights and cash-flow rights affects managerial extraction of private benefits of control. We find that as the insider control-cash flow rights divergence becomes larger, dual-class acquirers...

The paper analyses the question who should be provided with incentives to acquire and reveal information about the quality of an investment proposal: the divisional manager, who derives private benefits of control from the project and therefore prefers to carry out the project, or the capital...

Recent corporate governance reforms focus on board independence and encourage equity ownership by directors. We analyze the efficacy of these reforms in a model where both adverse selection and moral hazard exist at the level of the firm's management. Delegating governance to the board improves...

This paper considers an agency model in which a firm's manager receives private information about an investment project. The manager has unique skills that are essential for implementing the project, and he can pursue the project inside the firm or as an outside venture on his own. The firm's...

Contracts are examined when outcomes depend on managers' choices as well as efforts. As the cost of effort shrinks relative to payoffs, the optimal contract converges to a linear payoff if the control space of the agent has full dimensionality, but not otherwise. Thus, when the agent can trade...

This paper studies the capital budgeting process in a setting where a manager is privately informed about the profitability of an investment project and enjoys non-pecuniary benefits of control (empire benefits). I characterize the optimal required rate of return and show that a delegation...