In this paper, I provide two theories about why management might withhold information which is not proprietary, together with an analysis of the consequences altering various assumptions underlying these theories. Proprietary considered here as any whose disclosure potentially alters a firm's future earnings gross senior management's compensation.' Even if manager's private shareholders may benefit occasionally from having disclosed (see Verrecchia [1983] and Dye [1984a]), although obvious...

There has been an enormous increase in auditing and accounting standards litigation against auditors. This paper examines some of the consequences these changes by developing a model audit market relating auditors' liability to standards. The demonstrates how equilibrium fees depend on both informational value option claim financial statement users have auditor's wealth event is determined substandard. Auditors' attitudes toward responses are studied, characteristics optimal rules evaluated.

In this paper, I propose and analyze two reasons shareholders might not be inclined to eliminate the tendency for managers engage in earnings management. The first motive is related stewardship value of accounting information. Once have determined which productive act they seek their management implement, must design a contract encourage select that action. If shareholders' sole objective designing minimize expected cost inducing preferred action, cost-minimizing encourages management, then...

Voluntary disclosures by some firms seem to provoke other make related disclosures. After Citibank announced the extent which its Third World loans were in default, many money center banks did likewise.' Chambers Development took a write-off for their waste disposal arrangements, management too.2 Several insurance companies successively disclosed potential liability from hurricanes Hugo3 and Andrew,4 Los Angeles earthquakes.5 Besides having that occur herds, there appears be another...

This paper discusses arguments for and against introducing competition into the accounting standard-setting process in U.S. by allowing individual corporations to issue financial reports prepared accordance with either FASB or IASB rules. The examines several supporting status quo, including (1) FASB's experience world leadership making rules; (2) increased risk of a “race bottom” under regulatory competition; (3) inability most users understand complex technical issues underlying standards;...

In this paper, I evaluate the effects of mandatory changes in accounting standards on firms' disclosure decisions. Several issues are addressed, including relation between reports and voluntary disclosures, imposing consistency choice, consequences increasing discretion procedures, implications requiring firms to issue more detailed reports. The analysis each these depends critically firm's motivation for choosing among financial reporting techniques. Throughout assume that a choice...

ABSTRACT This paper studies how an accountant's method of aggregating information in a financial report is affected by differences the reliability and relevance components report. We study firm that hires accountant to produce reveals investors regarding returns firm's past investments. In constructing report, must combine elicited from manager with other directly observable accountant. The manager's assumed be only superior quality available Reliability‐relevance trade‐offs arise because as...

ABSTRACT: This paper develops a model of financing that jointly determines firm’s capital structure, its voluntary disclosure policy, and cost capital. Investors who receive securities in return for supplying sometimes incur losses when they trade their with an informed trader. The policy the structure determine information advantage trader and, hence, size investors’ trading We establish hierarchy optimal policies varies volatility cash flows. Debt are often optimal, form debt—risk-free,...

This paper studies a model of “classifications manipulation” in which accounting reports consist one two binary classifications, preparers prefer classification over the other, an standard designates official requirements that have to be met receive preferred classification, and may engage order their classification. The possibility classifications manipulation creates distinction between described statement de facto determined by “shadow standard” actually adopted preparers. selection...

This article considers a principal-agent problem in which the principal has access to costly monitoring technology that can be used acquire additional information about agent's actions subsequent observing output. Although randomized policies are feasible, we show variety of contexts optimal deterministic and lower-tailed, is, there exists some critical level output such further investigation occurs if only falls below this level.

Abstract Capital market participants collectively may possess information about the valuation implications of a firm's change in strategy not known by management firm proposing change. We ask whether can exploit capital market's deciding either to proceed with contemplated or continue previously initiated In case proposed change, we show that managers extract announcing potential new strategy, and then conditioning decision implement on size price reaction announcement. Under this...

Relative performance evaluation (RPE) occurs when one person's compensation depends on the relation of his output to that others. Agency theory (e.g., Lazear and Rosen [1981] Holmstrom [1979; 1982]) predicts managerial will use relative other firms' outputs reveal information about manager's actions which is not knowable from alone. Tests measure using firms in same industry or some macroeconomic measures performance. These two approaches are designed separate economy effects actions....

Managers are frequently requested to provide information about factors which influence their performance is subsequently used determine compensation. Since independent means of verifying the accuracy reported may not be available, and since managers governed by own self-interests, it might seem futile for owners request rely on such information. Nevertheless, there a wide variety circumstances under these requests made-management forecasts, standard-setting, bottom-up capital budgeting....

We study a seller of an asset who is liable for damages if the fails to disclose buyers estimate asset's value he knew prior sale. Our results include as either “damages multiplier” that determines size must pay increases, or probability caught withholding his from discloses less often, and precision seller's sells larger fraction asset.