Discontinuity in earning reports and managerial incentives

摘要: This paper provides a rational explanation for earnings discontinuity in the context of agency model. A company manager often possesses private information about project’s expected return. is valuable to firm because early warning that project unlikely succeed allows fire and discontinue with an loss. When issuing report, can choose engage real management report higher-than-actual current period, but as result, overall cash flow from will be undermined. The only way extract manager’s offer him generous severance payment compensation disclosing bad news. It shown any optimal contract induces overinvestment management. Furthermore, reports arises endogenously under most circumstances. For linear cost misreporting, presents closed-form solution shows existence area depends negatively on size positively managerial effort. These results are line empirical studies executive agreements. ∗Haas School Business, UC Berkeley, CA 94720, 510-643-1411, or by email at fedyk@haas.berkeley.edu. I am indebted Sunil Dutta continuous encouragement guidance. also grateful helpful comments Nicole Bastian-Johnson, Qintao Fan, Botond Koczegi, John Morgan. Any remaining errors my own.