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Capital structure and earnings manipulation

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  • Miglo, Anton

Abstract

We consider an optimal contract between an entrepreneur and an investor, where the entrepreneur is subject to a double-moral hazard problem (one being the choice of production effort and the other being earnings manipulation). Since the entrepreneur cannot entirely capture the results of his effort, investment is below the optimal level and production effort is socially inefficient. The opportunity to manipulate earnings protects the entrepreneur against the risk of a low payoff when production is unsuccessful. Ex ante, this provides an incentive for the entrepreneur to increase investment and improve effort.

Suggested Citation

  • Miglo, Anton, 2010. "Capital structure and earnings manipulation," Journal of Economics and Business, Elsevier, vol. 62(5), pages 367-382, September.
    • Handle: RePEc:eee:jebusi:v:62:y::i:5:p:367-382
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    References listed on IDEAS

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    1. Miglo, Anton, 2017. "Timing of earnings and capital structure," The North American Journal of Economics and Finance, Elsevier, vol. 40(C), pages 1-15.
    2. Miglo, Anton, 2012. "Multi-stage investment, long-term asymmetric information and equity issues," MPRA Paper 46692, University Library of Munich, Germany.
    3. Adil El Fakir & Richard Fairchild & Mohamed Tkiouat & Abderrahim Taamouti, 2023. "A bargaining model for PLS entrepreneurial financing: A game theoretic model using agent‐based simulation," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(2), pages 1228-1241, April.

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