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An information-based model for the differential treatment of gains and losses

Author

Listed:
  • Venky Nagar

    () (University of Michigan)

  • Madhav V. Rajan

    () (University of Chicago)

  • Korok Ray

    () (Texas A&M University)

Abstract

Abstract This study defines reporting conservatism as a higher verification standard for probable gains compared to losses and builds a model that endogenously generates optimal behavior resembling an asymmetric preference for gains versus losses. Our model considers the setting where one party produces a resource and another tries to expropriate it. The key factor determining the extent of the gain-loss asymmetry is the level of information asymmetry or trust between the two parties. The information asymmetry-based results of our model provide a simpler explanation for the vast empirical literature on conservatism, where the bulk of the economic relationships among the parties appear to be information-based with little direct relation to explicit debt contracts, a factor that has been the focus of theoretical arguments. We also suggest new empirical analyzes.

Suggested Citation

  • Venky Nagar & Madhav V. Rajan & Korok Ray, 2018. "An information-based model for the differential treatment of gains and losses," Review of Accounting Studies, Springer, vol. 23(2), pages 622-653, June.
  • Handle: RePEc:spr:reaccs:v:23:y:2018:i:2:d:10.1007_s11142-018-9443-5
    DOI: 10.1007/s11142-018-9443-5
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Conservatism; Information asymmetry; Evolution; Risk preferences;

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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