search query: @author Sridhar, S.S. / total: 3
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| Author: | Dye, R.A. Sridhar, S.S. |
| Title: | Reliability-relevance trade-offs and the efficiency of aggregation |
| Journal: | Journal of Accounting Research
2004 : MAR, VOL. 42:1, p. 51-88 |
| Index terms: | Accounting Accountants Markets Prices Investments Financial statements Information |
| Language: | eng |
| Abstract: | This paper studies how an accountant's method of aggregating information (here as: i. for information) in a financial report is affected by differences in reliability and relevance of components of the report. The paper studies a firm hiring an accountant to produce a report revealing i. to investors regarding the returns to the firm's past investments. In constructing the report, the accountant must combine i. from the firm's manager with other i. directly observable to the accountant. The manager's i. is assumed to be directly observable only by the manager and to be of superior quality to the other i. available to the accountant. Reliability-relevance trade-offs arise because as the accountant places more weight on the manager's report, potentially more useful i. gets included in the report, at the cost of encouraging the manager to distort his or her i. to a greater extent. Capital market participants anticipate this behaviour and price the firm accordingly. It is shown how the market's price response to the release of the firm's aggregate report, the efficiency of the firm's investment decisions, and the manager's incentives to manipulate the soft i. under his or her control are all affected byand affectthe aggregation procedure the accountant adopts. |
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