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Business Research

pp 1–25

First Online: 05 July 2017Received: 20 May 2016Accepted: 19 June 2017


We consider a two-period LEN-type agency problem. The principal needs to implement one out of two accounting systems. One emphasizes relevance, the other reliability. Both systems produce identical inter-temporally correlated signals. The relevant system reports an accounting signal in the period in which it is produced. The reliable system reports a more precise signal, but with a one period delay. Accounting information is contractible only if it is reported within the two-period horizon of the game. Accordingly, accounting information produced in the second period becomes uncontractible with the reliable system in place. Non-accounting information needs to be used for contracting to provide any second period incentives at all. We derive optimal compensation contracts in a full and in a limited commitment setting. With full commitment, the reliable system trades-off more precise first and less precise second-period contractible information, as compared to the relevant system. If the reduction of noise in the accounting signals is strong and the distortion in the non-accounting measure is weak, the reliable system is preferred. With limited commitment we identify a similar trade-off if intertemporal correlation of the signals is negative. If it is positive, this trade-off might reverse: The reliable system is possibly preferred if noise reduction is small and the non-accounting measure is heavily distorted. Noisiness in performance measures then serves as a commitment device. It reduces otherwise overly high powered incentives and thus benefits the principal.

KeywordsAccounting information Agency-problem Limited commitment Timeliness We acknowledge helpful comments from Joachim Gassen the editor, two anonymous reviewers, Christian Hofmann, Sandra Kronenberger, Konrad Lang, Carolin Mauch, and from conference-seminar participants at Berlin 2013, Graz 2015 and Tallinn EAA annual conference 2014.

JEL ClassificationM4 D8 C7  Download fulltext PDF

Autor: Barbara Schöndube-Pirchegger - Jens Robert Schöndube


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