We study the optimal shareholder–manager contract having the property to induce the manager to exert high effort and truthfully reveal firm performance. This contract design problem is solved under the assumption of imperfect auditing, either because of mistakes or because of collusion between managers and auditors. The imperfection of the audit technology is costless up to a threshold, beyond which it causes a distortion in the incentive compatible contract or even prevents its existence. This result may help explain the observed decline in the use of stock options, tracing it back to an unfocused activity or poor performance of auditors.

Baglioni, A. S., Colombo, L. V. A., The effects of imperfect auditing on managerial compensation, <<INTERNATIONAL REVIEW OF ECONOMICS & FINANCE>>, 2011; 20 (4): 542-548. [doi:10.1016/j.iref.2010.10.001] [http://hdl.handle.net/10807/3400]

The effects of imperfect auditing on managerial compensation

Baglioni, Angelo Stefano;Colombo, Luca Vittorio Angelo
2011

Abstract

We study the optimal shareholder–manager contract having the property to induce the manager to exert high effort and truthfully reveal firm performance. This contract design problem is solved under the assumption of imperfect auditing, either because of mistakes or because of collusion between managers and auditors. The imperfection of the audit technology is costless up to a threshold, beyond which it causes a distortion in the incentive compatible contract or even prevents its existence. This result may help explain the observed decline in the use of stock options, tracing it back to an unfocused activity or poor performance of auditors.
2011
Inglese
Baglioni, A. S., Colombo, L. V. A., The effects of imperfect auditing on managerial compensation, <<INTERNATIONAL REVIEW OF ECONOMICS & FINANCE>>, 2011; 20 (4): 542-548. [doi:10.1016/j.iref.2010.10.001] [http://hdl.handle.net/10807/3400]
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/10807/3400
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