Advanced Search
MyIDEAS: Login

Reliability-Relevance Trade-Offs and the Efficiency of Aggregation

Contents:

Author Info

  • RONALD A. DYE
  • SRI S. SRIDHAR
Registered author(s):

    Abstract

    This paper studies how an accountant's method of aggregating information in a financial report is affected by differences in the reliability and relevance of components of the report. We study a firm that hires an accountant to produce a report that reveals information to investors regarding the returns to the firm's past investments. In constructing the report, the accountant must combine information elicited from the firm's manager with other information directly observable to the accountant. The manager's information is assumed to be directly observable only by the manager and to be of superior quality to the other information available to the accountant. Reliability-relevance trade-offs arise because as the accountant places more weight on the manager's report, potentially more useful information gets included in the report, at the cost of encouraging the manager to distort his or her information to a greater extent. Capital market participants anticipate this behavior and price the firm accordingly. We show how the market's price response to the release of the firm's aggregate report, the efficiency of the firm's investment decisions, and the manager's incentives to manipulate the soft information under his or her control are all affected by-and affect-the aggregation procedure the accountant adopts. In addition, we identify a broad range of circumstances under which aggregated reports are strictly more efficient than disaggregated reports because aggregation tempers the manager's misreporting incentives. We also demonstrate that, as any given component of the aggregated accounting report becomes softer, the equilibrium level of the firm's investment diminishes and the market places greater weight on the remaining components of the report. Copyright University of Chicago on behalf of the Institute of Professional Accounting, 2004.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1475-679X.2004.00129.x
    File Function: link to full text
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

    Bibliographic Info

    Article provided by Wiley Blackwell in its journal Journal of Accounting Research.

    Volume (Year): 42 (2004)
    Issue (Month): 1 (03)
    Pages: 51-88

    as in new window
    Handle: RePEc:bla:joares:v:42:y:2004:i:1:p:51-88

    Contact details of provider:
    Web page: http://www.blackwellpublishing.com/journal.asp?ref=0021-8456

    Order Information:
    Web: http://www.blackwellpublishing.com/subs.asp?ref=0021-8456

    Related research

    Keywords:

    References

    No references listed on IDEAS
    You can help add them by filling out this form.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as in new window

    Cited by:
    1. A. Szczesny & A. Lenk & T. Huang, 2008. "Substitution, availability and preferences in earnings management: empirical evidence from China," Review of Managerial Science, Springer, vol. 2(2), pages 129-160, July.
    2. Edward J. Riedl & Suraj Srinivasan, 2007. "Signaling Firm Performance Through Financial Statement Presentation: An Analysis Using Special Items," Harvard Business School Working Papers 09-031, Harvard Business School.
    3. Hann, Rebecca N. & Heflin, Frank & Subramanayam, K.R., 2007. "Fair-value pension accounting," Journal of Accounting and Economics, Elsevier, vol. 44(3), pages 328-358, December.

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:bla:joares:v:42:y:2004:i:1:p:51-88. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing) or (Christopher F. Baum).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.