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Imprecision in Accounting Measurement: Can It Be Value Enhancing?

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  • CHANDRA KANODIA
  • RAJDEEP SINGH
  • ANDREW E. SPERO

Abstract

Accounting measurements of firms' investments are usually imprecise. We study the economic consequences of such imprecision when it interacts with information asymmetry regarding an investment project's ex ante profitability, known only by the firm's managers. Absent agency and risk-sharing considerations, we find that some degree of accounting imprecision could actually be value enhancing. We characterize the optimal degree of imprecision and identify its key determinants. The greater the information asymmetry regarding the project's profitability, the greater is the imprecision that should be tolerated in the measurement of the firm's investment. Copyright 2005 The Institute of Professional Accounting, University of Chicago.

Suggested Citation

  • Chandra Kanodia & Rajdeep Singh & Andrew E. Spero, 2005. "Imprecision in Accounting Measurement: Can It Be Value Enhancing?," Journal of Accounting Research, Wiley Blackwell, vol. 43(3), pages 487-519, June.
  • Handle: RePEc:bla:joares:v:43:y:2005:i:3:p:487-519
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    Cited by:

    1. Ralf Ewert & Alfred Wagenhofer, 2015. "Economic Relations Among Earnings Quality Measures," Abacus, Accounting Foundation, University of Sydney, vol. 51(3), pages 311-355, September.
    2. Singh, Rajdeep & Yerramilli, Vijay, 2014. "Market efficiency, managerial compensation, and real efficiency," Journal of Corporate Finance, Elsevier, vol. 29(C), pages 561-578.
    3. Gao, Pingyang, 2008. "Disclosure Quality, Cost of Capital, and Investors’ Welfare," MPRA Paper 9478, University Library of Munich, Germany, revised Jun 2008.
    4. de Haan, Thomas & Offerman, Theo & Sloof, Randolph, 2011. "Noisy signaling: Theory and experiment," Games and Economic Behavior, Elsevier, vol. 73(2), pages 402-428.
    5. Berger, Philip G., 2011. "Challenges and opportunities in disclosure research—A discussion of ‘the financial reporting environment: Review of the recent literature’," Journal of Accounting and Economics, Elsevier, vol. 51(1), pages 204-218.
    6. Beyer, Anne & Cohen, Daniel A. & Lys, Thomas Z. & Walther, Beverly R., 2010. "The financial reporting environment: Review of the recent literature," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 296-343, December.
    7. Marco Muscettola, 2014. "Probability of Efficiency: Statistical Implications That Lead Firms to Achieve a Minimal and Sufficient ¡°Return-On-Investment¡±," Journal of Management and Strategy, Journal of Management and Strategy, Sciedu Press, vol. 5(4), pages 26-36, November.
    8. Eva Labro & Mario Vanhoucke, 2008. "Diversity in Resource Consumption Patterns and Robustness of Costing Systems to Errors," Management Science, INFORMS, vol. 54(10), pages 1715-1730, October.
    9. Dutta, Sunil & Reichelstein, Stefan J., 2004. "Stock Price, Earnings and Book Value in Managerial Performance Measures," Research Papers 1873, Stanford University, Graduate School of Business.
    10. repec:eee:jaecon:v:63:y:2017:i:2:p:499-512 is not listed on IDEAS
    11. repec:eee:advacc:v:30:y:2014:i:2:p:328-337 is not listed on IDEAS

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