“An Empirical Model of Long-Term Contracting with Manipulation” – by Dr. Jeremy Bertomeu
Accounting & Law Seminar
Dr. Jeremy Bertomeu
Associate Professor of Accounting
Rady School of Management
University of California, San Diego
Accounting frauds are corporate events in which management intentionally misleads investors by deviating from commonly-accepted accounting practices. To study its prevalence and real consequences, we develop an agency model based on DeMarzo and Sannikov (2006) in which managerial incentives and manipulation of reported earnings give rise to accounting frauds. We derive the optimal compensation contract under the possibility of misreporting and random SEC investigations. Preliminary estimates suggest that a small portion of net income is misstated but such misstatements cause a substantial reduction of firm value even in large public firms.