Accounting Recognition, Moral Hazard, and Communication

Posted: 28 May 1999

See all articles by Pierre Jinghong Liang

Pierre Jinghong Liang

Tepper School of Business, Carnegie Mellon University

Abstract

Two complementary sources of information are studied in a multi-period agency model. One is an accounting source which partially but credibly conveys the agent's private information through accounting recognition. The other is an unverified communication by the agent (i.e., a self-report). In a simple setting with no communication, alternative labor market frictions lead to alternative optimal recognition policies. When the agent is allowed to communicate his private information, accounting signals serve as a veracity check on the agent's self-report. Finally, such communication sometimes makes delaying the recognition optimal. We see contracting and confirmatory roles of accounting as its comparative advantage. As a source of information, accounting is valuable because accounting reports are credible, comprehensive, and subject to careful and professional judgment. While other information sources may be more timely in providing valuation information about an entity, audited accounting information, when used in explicit or implicit contracts, ensures the accuracy of the reports from non-accounting sources.

JEL Classification: M41, D82

Suggested Citation

Liang, Pierre Jinghong, Accounting Recognition, Moral Hazard, and Communication. Available at SSRN: https://ssrn.com/abstract=166091

Pierre Jinghong Liang (Contact Author)

Tepper School of Business, Carnegie Mellon University ( email )

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Pittsburgh, PA 15213-3890
United States
412-268-3315 (Phone)
412-268-6837 (Fax)

HOME PAGE: http://www2.tepper.cmu.edu/andrew/liangj

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