Management's reporting strategy and imperfection of the capital market

Joseph Tzur, Varda (Lewinstein) Yaari

Research output: Contribution to journalArticlepeer-review

1 Scopus citations

Abstract

Since the decision on the reported outcome is delegated to the management of the firm, it is commonly held that when the capital market is imperfect the manager achieves consumption smoothing by smoothing the reports relative to the actual outcome. Modeling the firm as a principal‐agent contract shows the contrary. When the capital market is imperfect the firm's reporting strategy is conservative, as the manager never reports more than the actual outcome because of fear of an unfavorable future outcome. When the capital market is perfect the firm either smooths the report‐reports more than the actual outcome when the actual outcome is low and reports less than the actual outcome when the outcome is hig‐or reports more than the actual outcome in order to take advantage of the sharing rule being an increasing function of the report.

Original languageEnglish
Pages (from-to)57-61
Number of pages5
JournalManagerial and Decision Economics
Volume15
Issue number1
DOIs
StatePublished - 1 Jan 1994
Externally publishedYes

Fingerprint

Dive into the research topics of 'Management's reporting strategy and imperfection of the capital market'. Together they form a unique fingerprint.

Cite this