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Asymmetric Monitoring: Good Versus Bad News Verification

Author

Listed:
  • John Christensen
  • Joel S. Demski

Abstract

We analyze a principal-agent setting with multiple sources of contracting information in which the signal from each source can be unmistakably interpreted as “good” or “bad” news. We then ask whether it is best to condition the acquisition of one of the information sources on whether the earlier reporting source has reported “good” or “bad” news. That is, is it efficient to “chase the good news” or to “chase the bad news”? The answer depends on whether the earlier source is publicly observed or self-reported by the agent. We also explore ties to institutional features, and in particular conservative accounting treatments.

Suggested Citation

  • John Christensen & Joel S. Demski, 2004. "Asymmetric Monitoring: Good Versus Bad News Verification," Schmalenbach Business Review (sbr), LMU Munich School of Management, vol. 56(3), pages 206-222, July.
    • Handle: RePEc:sbr:abstra:v:56:y:2004:i:3:p:206-222
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    Citations

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    Cited by:

    1. Chi, Wuchun & Wang, Chenchin, 2010. "Accounting conservatism in a setting of Information Asymmetry between majority and minority shareholders," The International Journal of Accounting, Elsevier, vol. 45(4), pages 465-489, December.
    2. Joachim Gassen, 2008. "Are stewardship and valuation usefulness compatible or alternative objectives of financial accounting?," SFB 649 Discussion Papers SFB649DP2008-028, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    3. Haijin Lin, 2006. "Accounting Discretion and Managerial Conservatism: An Intertemporal Analysis," Contemporary Accounting Research, John Wiley & Sons, vol. 23(4), pages 1017-1041, December.
    4. David Hirshleifer & Siew Hong Teoh, 2009. "The Psychological Attraction Approach to Accounting and Disclosure Policy," Contemporary Accounting Research, John Wiley & Sons, vol. 26(4), pages 1067-1090, December.
    5. Penman, Stephen & Zhang, Xiao-Jun, 2020. "A theoretical analysis connecting conservative accounting to the cost of capital," Journal of Accounting and Economics, Elsevier, vol. 69(1).

    More about this item

    Keywords

    Agency; Asymmetric Monitoring; Conservative Accounting;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • M4 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting
    • M55 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Labor Contracting Devices

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