Communication and Income Smoothing Through Accounting Method Choice

Yoon S. Suh
Additional contact information
Yoon S. Suh: John E. Anderson Graduate School of Management, University of California, Los Angeles, California 90024

Management Science, 1990, vol. 36, issue 6, 704-723

Abstract: This paper shows how accounting income smoothing could arise as rational equilibrium behavior. I develop a two-period agency model in which an agent obtains, after the first period's production operation, private information regarding future productivity of the operation. Direct communication of the agent's private signal yields a strict Pareto improvement over no-communication in this two-period world since it allows the agent to achieve signal-contingent interperiod consumption smoothing. Delegation of accounting method choice to the agent is shown to be an alternative, Pareto-equivalent mechanism to direct communication in this paper. Thus, accounting method choice is one way to achieve interperiod signal-contingent consumption smoothing by smoothing accounting income. One such accounting choice which arises from the structure of the problem is the choice of depreciation method.

Keywords: information economics; agency contracts; communication; accounting income smoothing (search for similar items in EconPapers)
Date: 1990
References: Add references at CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
http://dx.doi.org/10.1287/mnsc.36.6.704 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:36:y:1990:i:6:p:704-723

Access Statistics for this article

More articles in Management Science from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().