경영자가 투자자에 비해 우월한 정보를 가지고 있을 때, 그 정보를 적절한 경영자 보상 계약을 통해 왜곡 없이 전달하는 방안 또는 감사인을 통해 적정성을 검증하는 방안

I investigate two ways to communicate information on performance from a corporate insider to outside investors in capital markets. One is direct and truthful communication through an incentive contract and the other is verification by an auditor.An incentive contract induces truthful report, and liquidation/continuation decision by capital markets is always correct. However, this contract is inefficient in that the interim wages contract is inverted. This inversion is corrected only when the final outcome is realized. If an auditor verifies managerial assertions, the inefficiency does not occur. The audit technology is noisy and could result in an audit failure, however. I establish the existence and the uniqueness of the optimal audit quality. I also establish that the optimal audit fee consists of the direct cost of the audit and the compensation for the auditor's exposure to legal liability. To establish these results, I only require that the utility functions are additively separable.