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Game Analysis of the independent directors and managers surplus manipulation

Author: LiSong From: www.yourpaper.net Posted: 2009-10-24 02:00:33 Read:
Abstract: the managers generated from corporate enterprises formed after the separation of ownership and principal-agent relationship, while the information asymmetry contract friction cause managers to disclose false earnings information to obtain improper benefits. The use of game theory, mixed strategy Nash equilibrium exists between managers and investors can be found, and this analysis shows that the introduction of the independent director system will contribute to the solution of the above problems. Game analysis by the independent directors and managers to conclude: the independent director independence is the key to prevent earnings manipulation managers. On this basis, a number of recommendations to improve the independence of independent directors.
Keywords: managers; asymmetric information; earnings manipulation; Game; independent directors

A principal - agent relationship managers formation base

The so-called principal - agent relationship is a contractual relationship, by this contract, a person or person (the principal) delegated to another person (the agent) to engage in an activity for the interests of the principal, but this is different from the general employment relationship, the principal granted Nominees considerable autonomous decision-making power, while the principal difficult to monitor the activities of agents. Agency relationship in the modern market economy, a large number of performance for the relationship between the assets in the shares of the company owners (investors) and enterprise managers.
Agency relationship with the gradual separation of corporate ownership and control (the right to operate). In the 18th century, the dominant owners of enterprises, business owners, operators, ownership and management rights into one, there is no agency relationship. To the mid-19th century, in the process of socialization of production increasing degree of expansion and market linkages, firm size is expanding, which requires operators not only to have management expertise, and have a professional technical knowledge to effectively organize enterprises for production, to win in the market competition. In this case, the origin and composition of the structure of the business has changed, a group of the emerging professional managers gradually formed, to become an agent of the owner, old business owners enterprise evolved into modern managers enterprises. " The the modern AG this form of business organization has played a great role in promoting the development of the agency relationship. Because a large number of dispersed shareholders, not the direct management of the enterprise and disposable, the enterprise must be entrusted to the operations manager, the manager is an agent of the owners (shareholders), its operating decision.

Second, information asymmetries and contractual friction is the manager of earnings manipulation prerequisite

Agency relationship usually showed a series of contractual relationships, the direction of the principal and the agent of the action in this series of contractual specifications. However, because the manager is not directly owned enterprises, it tends to pursue to maximize control over, but with corporate investors often pursue residual claim to maximize. Therefore, the objective function of managers and investors are often inconsistent. Targeted action for maximum assurance agent (manager) in accordance with the interests of the principal (investors) prior contract stipulates agents need to complete the mission objectives, and linked to this goal and benefit managers to motivate their actions. The Managers To obtain appropriate remuneration and benefits of control must be in accordance with the goals of the contract work hard. General, accounting earnings information because of the reliability, verifiability, nature, and they often are used as the outcome of the assessment manager can observe the target information.
In addition to the moral hazard caused by asymmetric information, another premise is to induce managers to manipulate accounting earnings the incompleteness and rigidity of the contract. Signing a contract is prior behavior, because of bounded rationality, the contract can not address every uncertainty matters. Once the contract is signed, even if new matters, contract commissioning party negotiations too costly Agent will not re-signed a new contract, that contract showed a certain degree of rigidity. Agent to complete the task in accordance with the original contract is bound to have to take advantage of its internal information advantage through the manipulation of the contract goals, namely, accounting surplus to achieve its own utility maximization.

Manager earnings manipulation mechanism analysis - from the perspective of the game

The motivation of earnings manipulation managers is to maximize its own utility. Due to the existence of the contract and the effectiveness of the capital market assumptions, both sides benefit from common knowledge. Therefore, both game performance the static mixed game of perfect information. Now its strategic formula expressed as follows:
The figures on the left in the following table is the benefit of investors, the right is the manager's benefit, the above figures are greater than 0. Where C represents the cost spent in earnings manipulation managers, both including forgery digital needs of cost, also including fraud may face punishment. To as close as possible to the actual situation at the same time, we assume that investors and managers in this behavior is uncertain, namely: managers manipulate earnings, investors choose to invest in the probability of q P is the probability of selection.
When managers select P probability manipulation surplus:
Investors choose to vote in the expected revenue is:-aP (1-P) b; choose not to vote gains 0. Select investors vote do not vote no difference in expected revenue, namely:-aP (1-P) b = 0; the available managers manipulate earnings optimal probability P = b / (a ?? b).
When investors choose to invest in the probability of q:
Managers manipulate earnings expected return is: q (RC) - (1-q) C; choose not to manipulate earnings income: qD. No difference in expected revenue managers manipulate earnings and not to manipulate earnings, namely: - (1-q) q (RC) C = qD; can get investors to invest in the optimal probability q = C / (RD)
Therefore, to make the probability of investors increases, it is necessary to make the C value increases. When the C value increases to RC
Fourth, the independent directors of the manager surplus manipulation inhibition analysis independent directors generally refers to corporate enterprises in the independent shareholders of the Company and is no longer within the company directors serving. Because the internal directors as independent directors Unlike directly subject to the controlling shareholder and the company's management, which is conducive to the independent judgment of the Board of Directors of the company's affairs. The purpose of the establishment of an independent director, the the constraints controlling shareholder of the use of its controlling position to make the decision-making that is not conducive to the interests of the company and minority shareholders, independent monitoring of the Company's management to curb insider control phenomenon. In general, the independent directors have special rights, its most important feature is its independent listed company and its management. Independent directors are able to perform its oversight and restraining effect also on whether or not to have substantial independence. The company's unique role in the decision with company managers in most cases is a non-cooperative game situation. Actions from both the perspective of game theory analysis:
Assuming 1, the independent directors and the manager of the company per capita as a rational person, the purpose of the action is to pursue their own utility maximization.
Assumption 2, the independent directors have enough expertise to judge whether the managers were surplus to manipulate. Therefore, the manager's actions can be observed to be independent directors.
Hypothesis 3, both sides benefit from common knowledge.
The manager's actions as manipulation or manipulation; managers of independent directors observed actions independent or not independent (collusion).
The first letter in the brackets for the benefit of the managers; second letter to the benefit of independent directors. Which, S0 manager's normal benefit; S1 is the benefit of the managers in the independence of the independent directors; S2 is the benefit of independent directors are not independent managers. Obviously, S1 in accordance with the idea of ??backward induction when independent directors proceeds R1 independence than independent benefit R2, the independent directors choose independence, independent directors select independent manager people choose not to manipulate. If the independence of the independent directors received the proceeds to benefit less than independent (collusion), the choice of independent directors are not independent (collusion), managers manipulate earnings. Therefore, in order for independent directors to maintain the independence Cheating oversight managers an incentive to safeguard the interests of external investors, it is necessary to create a series of institutional system, to ensure that the independent directors to maintain the independence granted to the benefit lost its independence to obtain the benefit.
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