1. Conservative Accounting, Agent's Participation and Stewardship Value of Information
- Author
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François Larmande, Haldemann, Antoine, emlyon business school, and HEC Research Paper Series
- Subjects
Principal Agent ,050208 finance ,Actuarial science ,Earnings ,Limited liability ,Risk aversion ,05 social sciences ,Principal–agent problem ,050201 accounting ,Conservatism ,Value of information ,Accounting conservatism ,Earnings management ,JEL: M - Business Administration and Business Economics • Marketing • Accounting • Personnel Economics/M.M4 - Accounting and Auditing/M.M4.M41 - Accounting ,JEL: M - Business Administration and Business Economics • Marketing • Accounting • Personnel Economics/M.M5 - Personnel Economics/M.M5.M52 - Compensation and Compensation Methods and Their Effects ,0502 economics and business ,Accounting information system ,Economics ,[SHS.GESTION]Humanities and Social Sciences/Business administration ,[SHS.GESTION] Humanities and Social Sciences/Business administration ,JEL: D - Microeconomics/D.D8 - Information, Knowledge, and Uncertainty/D.D8.D82 - Asymmetric and Private Information • Mechanism Design ,Ranking of accounting information systems - Abstract
This article aims to clarify the consequences of accounting conservatism from a stewardship (principal-agent) point of view. Prior literature argues that the limited liability of the agent always results in a demand for conservatism, and that conservatism is beneficial because it deters earnings management. I challenge both arguments. Firstly, I show and derive the conditions under which an aggressive (or liberal) accounting information system might be preferred to a conservative one when the agent has limited liability. Risk aversion plays a crucial role, with a higher degree of risk aversion encouraging increased aggressiveness. Secondly, I provide the stylized example of choosing between rules-based (Rules ) and principles-based (Principles ) accounting. The latter, involving greater subjectivity, might increase the likelihood of earnings manipulation, but enables the agent to communicate relevant, albeit self-serving, private information. Both effects result in Principles being less conservative than Rules. I show that Principles might, nonetheless, be optimal, depending on the value of the likelihood ratio of manipulation versus the provision of relevant information. Manipulation and self-serving reports, which introduce an aggressive bias, might be the price to pay for more informative accounts.
- Published
- 2014