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Relevance versus reliability of accounting information with unlimited and limited commitment

Author

Listed:
  • Barbara Schöndube-Pirchegger

    (Otto-von-Guericke University Magdeburg)

  • Jens Robert Schöndube

    (Leibniz Universität Hannover)

Abstract

We consider a two-period LEN-type agency problem. The principal needs to implement one out of two accounting systems. One emphasizes relevance, the other reliability. Both systems produce identical inter-temporally correlated signals. The relevant system reports an accounting signal in the period in which it is produced. The reliable system reports a more precise signal, but with a one period delay. Accounting information is contractible only if it is reported within the two-period horizon of the game. Accordingly, accounting information produced in the second period becomes uncontractible with the reliable system in place. Non-accounting information needs to be used for contracting to provide any second period incentives at all. We derive optimal compensation contracts in a full and in a limited commitment setting. With full commitment, the reliable system trades-off more precise first and less precise second-period contractible information, as compared to the relevant system. If the reduction of noise in the accounting signals is strong and the distortion in the non-accounting measure is weak, the reliable system is preferred. With limited commitment we identify a similar trade-off if intertemporal correlation of the signals is negative. If it is positive, this trade-off might reverse: The reliable system is possibly preferred if noise reduction is small and the non-accounting measure is heavily distorted. Noisiness in performance measures then serves as a commitment device. It reduces otherwise overly high powered incentives and thus benefits the principal.

Suggested Citation

  • Barbara Schöndube-Pirchegger & Jens Robert Schöndube, 2017. "Relevance versus reliability of accounting information with unlimited and limited commitment," Business Research, Springer;German Academic Association for Business Research, vol. 10(2), pages 189-213, October.
    • Handle: RePEc:spr:busres:v:10:y:2017:i:2:d:10.1007_s40685-017-0050-2
    DOI: 10.1007/s40685-017-0050-2
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    References listed on IDEAS

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    More about this item

    Keywords

    Accounting information; Agency-problem; Limited commitment; Timeliness;
    All these keywords.

    JEL classification:

    • M4 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory

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