Accounting for Compensation: Dynamic Moral Hazard and Optimal Accruals

Seung Lee, Jonathan Bonham

Publikation: Working paperForskningpeer review

Abstrakt

We investigate the impact of accrual accounting policies on contracting and productive efficiency in a continuous-time moral hazard framework. An agent who controls unobservable fundamental performance is compensated via a contract written on cash flows, which contain timing errors, and accounting earnings, which correct timing errors at the expense of introducing estimation errors. Deferred compensation and accruals act as substitutes in solving the incentive problems created by timing errors in cash flows. Accruals are the primary control mechanism late in the agency relationship, when the most efficient accrual policy is time-invariant and standardized---it depends only on the controllability and measurability of fundamental performance as opposed to agency-specific parameters such as risk aversion and discount rates. By contrast, deferred compensation is the primary control mechanism early in the agency relationship, when the most efficient accrual policy changes over time, is non-standardized, and corrects fewer timing errors than the standardized policy.
OriginalsprogEngelsk
StatusUnder udarbejdelse - 2020

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