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Conservative Accounting, Agent's Participation and Stewardship Value of Information

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.
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https://hal-hec.archives-ouvertes.fr/hal-02002720
Contributor : Antoine Haldemann Connect in order to contact the contributor
Submitted on : Thursday, January 31, 2019 - 7:41:54 PM
Last modification on : Thursday, March 31, 2022 - 5:58:02 PM

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  • HAL Id : hal-02002720, version 1

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François Larmande. Conservative Accounting, Agent's Participation and Stewardship Value of Information. 2014. ⟨hal-02002720⟩

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