On the Effects of the Degree of Discretion in Reporting Managerial performance

A.M.B. De Waegenaere, J.L. Wielhouwer

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Abstract

We consider a principal-agent setting in which a manager’s compensation de- pends on a noisy performance signal, and the manager is granted the right to choose an (accounting) method to determine the value of the performance signal. We study the effect of the degree of such reporting discretion, measured by the number of acceptable methods, on the optimal contract, the expected cost of com- pensation and the manager’s expected utility. We find that while an increase in reporting discretion never harms the manager, the effect on the expected cost of compensation is more subtle. We identify three main effects of increased report- ing discretion and characterize the conditions under which the aggregate of these three effects will lead to a higher or lower cost of compensation.
Original languageEnglish
Place of PublicationTilburg
PublisherAccounting
Number of pages33
Volume2008-21
Publication statusPublished - 2008

Publication series

NameCentER Discussion Paper
Volume2008-21

Keywords

  • managerial compensation
  • reporting flexibility

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    De Waegenaere, A. M. B., & Wielhouwer, J. L. (2008). On the Effects of the Degree of Discretion in Reporting Managerial performance. (CentER Discussion Paper; Vol. 2008-21). Accounting.