Relevance versus reliability of accounting information with unlimited and limited commitment
Abstract 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...
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| Format: | Article |
| Language: | English |
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Springer
2017-07-01
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| Series: | Business Research |
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| Online Access: | http://link.springer.com/article/10.1007/s40685-017-0050-2 |
| _version_ | 1818734949909397504 |
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| author | Barbara Schöndube-Pirchegger Jens Robert Schöndube |
| author_facet | Barbara Schöndube-Pirchegger Jens Robert Schöndube |
| author_sort | Barbara Schöndube-Pirchegger |
| collection | DOAJ |
| description | Abstract 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. |
| first_indexed | 2024-12-18T00:13:30Z |
| format | Article |
| id | doaj.art-b372fd93ec7243168e85cdc0dfb01874 |
| institution | Directory Open Access Journal |
| issn | 2198-3402 2198-2627 |
| language | English |
| last_indexed | 2024-12-18T00:13:30Z |
| publishDate | 2017-07-01 |
| publisher | Springer |
| record_format | Article |
| series | Business Research |
| spelling | doaj.art-b372fd93ec7243168e85cdc0dfb018742022-12-21T21:27:35ZengSpringerBusiness Research2198-34022198-26272017-07-0110218921310.1007/s40685-017-0050-2Relevance versus reliability of accounting information with unlimited and limited commitmentBarbara Schöndube-Pirchegger0Jens Robert Schöndube1Otto-von-Guericke University MagdeburgLeibniz Universität HannoverAbstract 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.http://link.springer.com/article/10.1007/s40685-017-0050-2Accounting informationAgency-problemLimited commitmentTimeliness |
| spellingShingle | Barbara Schöndube-Pirchegger Jens Robert Schöndube Relevance versus reliability of accounting information with unlimited and limited commitment Business Research Accounting information Agency-problem Limited commitment Timeliness |
| title | Relevance versus reliability of accounting information with unlimited and limited commitment |
| title_full | Relevance versus reliability of accounting information with unlimited and limited commitment |
| title_fullStr | Relevance versus reliability of accounting information with unlimited and limited commitment |
| title_full_unstemmed | Relevance versus reliability of accounting information with unlimited and limited commitment |
| title_short | Relevance versus reliability of accounting information with unlimited and limited commitment |
| title_sort | relevance versus reliability of accounting information with unlimited and limited commitment |
| topic | Accounting information Agency-problem Limited commitment Timeliness |
| url | http://link.springer.com/article/10.1007/s40685-017-0050-2 |
| work_keys_str_mv | AT barbaraschondubepirchegger relevanceversusreliabilityofaccountinginformationwithunlimitedandlimitedcommitment AT jensrobertschondube relevanceversusreliabilityofaccountinginformationwithunlimitedandlimitedcommitment |