Finance Seminar - Paul Povel - Houston


A seminar by Professor Paul Povel from the University of Houston

Title: Lying to Speak the Truth: Selective Manipulation and Improved Information Transmission

Abstract: We show that firms may benefit from allowing some earnings management, because it can make noisy signals more informative. We model a firm that cannot observe a manager’s cost of effort, her effort choice, and whether she manipulated a publicly observable performance report. An optimal contract links compensation to both the eventually realized firm value and the (possibly manipulated) report, since both are noisy measures of effort provision. It may be optimal to incentivize selective manipulation of the report by a manager who exerted a high effort level: Doing so can convert a falsely unfavorable report into a favorable one, thereby strengthening the link between effort and compensation.

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Paul Povel