Career concerns and mandated disclosure

Romana L. Autrey, Shane S. Dikolli, D. Paul Newman

Research output: Contribution to journalArticlepeer-review

Abstract

This paper examines the effects of mandated disclosure on the design of contracts and induced behavior in the presence of career concerns. We analyze the impact of two key properties of a mandated performance measure that is publicly disclosed: its sensitivity to the agent's effort and its informativeness about the agent's ability. We show conditions under which the agent's effort (and the firm's output) and the pay-for-performance weight critically depend on these two properties. In particular, when the mandated measure is sufficiently noisy, the pay-for-performance weight always decreases relative to a setting with no mandated measure. But when the mandated measure's noise is close to that of the existing performance measure, the effect of a mandated measure on the pay-for-performance weight depends on the effort-sensitivity and informativeness of the measure. We also characterize settings where a mandated disclosure would be desirable or not; variations arise because mandated disclosures can increase both effort and risk. Our results imply that mandating the public disclosure of performance measures, particularly measures that are relatively informative about ability but are difficult to influence through managerial effort, may have the unintended consequence of generating inefficiencies in firms' employment contracts.

Original languageEnglish (US)
Pages (from-to)527-554
Number of pages28
JournalJournal of Accounting and Public Policy
Volume26
Issue number5
DOIs
StatePublished - Sep 2007

Keywords

  • Career concerns
  • Implicit incentives
  • Incentive contracts
  • Mandated disclosure

ASJC Scopus subject areas

  • Accounting
  • Sociology and Political Science

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