We examine the effects of mandating compensation disclosure on executive incentive contracts, earnings management, firm value, and social welfare. We develop a moral hazard model with multiple principal-agent pairs facing an external monitor who allocates resources across firms to verify earnings management. With such scrutiny allocation, contracts exhibit externalities that create a coordination problem among principals. Contract disclosure enables principals to design the contract anticipating the monitor’s reaction. However, it may also exacerbate the coordination problem among principals because they do not consider externalities on other principals caused by the effects of their contract choices on the monitor’s scrutiny allocation. If internal controls are relatively weak, contract disclosure may make contracts more strongly contingent on reported earnings, increase earnings manipulation, and nevertheless increase social welfare. Contract disclosure improves firm value only if the scrutiny resources available to the monitor are not strongly constrained.

A firm manager is concerned about both the firm value and the market assessments of his abilities. When investing in a project, he has private knowledge of his project-related ability that interacts with the project investment, and his general ability that produces a cash flow independent of the project cash flow. The concerns about the general (project-related) ability assessment create a signaling incentive to decrease (increase) investment. In the presence of underinvestment (overinvestment), higher-quality earnings information reduces (improves) equilibrium efficiency. When the manager issues an earnings forecast as an additional signaling device, the forecast is upwardly biased, and the equilibrium investment is smaller than that without a forecast. The latter is because the signaling incentive to decrease investment is strengthened. When the manager’s concerns about the general ability assessment are relatively large, he is better off by committing to no forecast. Novel empirical predictions about investment and earnings forecast emerge.