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The Disciplining Role of Accounting in the Long-Run

Author

Listed:
  • Anil Arya

    (The Ohio State University)

  • Jonathan Glover

    (Carnegie Mellon University)

  • Brian Mittendorf

    (Yale School of Management)

  • Li Zhang

    (The Anderson School at UCLA)

Abstract

One role of accounting is to discipline softer (more manipulable) sources of information. We use a principal-agent model of hidden actions and hidden information to study this role. In our model, there is both a verifiable signal (a publicly observed output) and an unverifiable signal (a productivity parameter privately observed by the agent). In a one-period setting, the optimal contract does not make use of the agent’s report on the private signal. However, when the output is tracked over two periods, the agent’s communication can be valuable. This reversal of results suggests uncovering the disciplining role of accounting may require a long-term perspective.

Suggested Citation

  • Anil Arya & Jonathan Glover & Brian Mittendorf & Li Zhang, 2004. "The Disciplining Role of Accounting in the Long-Run," Review of Accounting Studies, Springer, vol. 9(4), pages 399-417, December.
    • Handle: RePEc:spr:reaccs:v:9:y:2004:i:4:d:10.1007_s11142-004-7790-x
    DOI: 10.1007/s11142-004-7790-x
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