Accounting, innovation, and incentives

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jengtecman.2006.02.008 Byline: Parunchana Pacharn (a), Li Zhang (b) Keywords: Innovation; Incentives; Intangible asset; Goodwill; Task assignment Abstract: This paper studies two scenarios of incentive issues related to innovation: the first is related to organizational innovation and the second is related to technological innovation. In the first scenario, we show that diversification across substitutive projects can actually make incompetent management more visible, and hence reduce incentive costs. In the second scenario, we illustrate that the new accounting standard on goodwill impairment may have a positive impact on incentive contracts even when the agent does not have control over the result of the impairment test. In both scenarios, we emphasize the out-of-equilibrium stewardship role of accounting information. We also stress the importance of distinguishing information content from value of information in contracting. Author Affiliation: (a) 366 Jacobs Management Center, Department of Accounting and Law, State University of New York at Buffalo, Buffalo, NY 14260-4000, United States (b) 110 Westwood Plaza, Suite D417, The Anderson School of Management, University of California, Los Angeles, CA 90095-1481, United States