TY - JOUR
T1 - The effects of imperfect auditing on managerial compensation
AU - Baglioni, Angelo Stefano
AU - Colombo, Luca Vittorio Angelo
PY - 2011
Y1 - 2011
N2 - 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.
AB - 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.
KW - corporate governance
KW - corporate governance
UR - http://hdl.handle.net/10807/3400
U2 - 10.1016/j.iref.2010.10.001
DO - 10.1016/j.iref.2010.10.001
M3 - Article
SN - 1059-0560
VL - 20
SP - 542
EP - 548
JO - INTERNATIONAL REVIEW OF ECONOMICS & FINANCE
JF - INTERNATIONAL REVIEW OF ECONOMICS & FINANCE
ER -