Accounting for the horizon

Florin M. Șabac
Firms have long-term relationships with economic agents such as managers, auditors, and suppliers that can be characterized as sequences of shorter lived agents interacting with a longer lived firm. In this framework, the agent's tenure with the firm becomes the object of investigation. Thus, when the firm starts a multi-period relationship with an agent, what is the role played by beliefs about the duration of the relationship? If the relationship is governed by long-term contracts and if the
more » ... ength of the contract can be chosen ex-ante, and commitment to a certain tenure is possible, is there an optimal ex-ante tenure from the firm's owners' point of view? This dissertation addresses several issues related to an agent's tenure in multi-period models, and is based on three essays. The first essay is on auditing and analyzes how beliefs about auditor tenure impact auditor independence and audit pricing. The second and third essays examine the question of optimal managerial tenure in a multi-period agency model, while at the same time investigating the value of commitment and how different assumptions about commitment impact the solution of the agency problem. One other common theme in the first and third essays is the lack of a "last period", so that, while the firm (the principal) has an infinite horizon and needs to consider a succession of auditors or managers, the agents (auditors or managers) have finite horizons. As a result, an agent's last period is not the last period of the model, the firm continues to exist and operate, and a new agent is hired.
doi:10.14288/1.0099707 fatcat:bmlkhytpxzgblo3irssqjrhx3a