Accounting Policies in Agencies with Moral Hazard and Renegotiation

Peter Ove Christensen, Joel S. Demski and Hans Frimor

Journal of Accounting Research, 2002, vol. 40, issue 4, 1071-1090

Abstract: We emphasize the role of accounting policies, and their audit, in an earnings management setting. We use a two–period agency in which three frictions interact: the agent privately observes action (or effort) supply and output, and the initial contract is subject to renegotiation. This creates a setting in which both players’ behavior is of concern, and, importantly, information rationing is efficient. Moreover, this information rationing is directly interpretable as being produced by an accounting policy whose application is ensured by an auditor.

Date: 2002
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Persistent link: https://EconPapers.repec.org/RePEc:bla:joares:v:40:y:2002:i:4:p:1071-1090

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Journal of Accounting Research is currently edited by Philip G. Berger, Luzi Hail, Christian Leuz, Haresh Sapra, Douglas J. Skinner, Rodrigo Verdi and Regina Wittenberg Moerman

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