An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Steven J. Huddart
Pennsylvania State University

Keith Crocker
Pennsylvania State University

Abstract: We derive optimal contracts between a firm's shareholder and its privately-informed manager when the manager has the discretion to manipulate a public report of firm value by deferring or accelerating recognition of value. For low realizations of firm value, the manager overstates value in his report and for high realizations of firm value, he understates value. The distribution of reported value in the model has the key characteristic of the distribution of firms earnings reports noted in the empirical literature, namely a low frequency of earnings reports below a threshold and a high frequency at the threshhold. Moreover, the revision in price at the disclosure of the manager's report resembles the S-shaped price response noted in the empirical literature.

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