Relevance versus reliability of accounting information with unlimited and limited commitment

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Schöndube-Pirchegger, Barbara; Schöndube, Jens Robert: Relevance versus reliability of accounting information with unlimited and limited commitment. In: Business Research 10 (2017), Nr. 2, S. 189-213. DOI:

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Sum total of downloads: 93

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.
License of this version: CC BY 4.0 Unported
Document Type: Article
Publishing status: publishedVersion
Issue Date: 2017
Appears in Collections:Wirtschaftswissenschaftliche Fakultät

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pos. country downloads
total perc.
1 image of flag of Germany Germany 29 31.18%
2 image of flag of United States United States 14 15.05%
3 image of flag of United Kingdom United Kingdom 6 6.45%
4 image of flag of Switzerland Switzerland 6 6.45%
5 image of flag of France France 5 5.38%
6 image of flag of China China 5 5.38%
7 image of flag of Malaysia Malaysia 3 3.23%
8 image of flag of India India 2 2.15%
9 image of flag of Canada Canada 2 2.15%
10 image of flag of Bulgaria Bulgaria 2 2.15%
    other countries 19 20.43%

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