An information-based model for the differential treatment of gains and losses

Venky Nagar (), Madhav V. Rajan () and Korok Ray ()
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Venky Nagar: University of Michigan
Madhav V. Rajan: University of Chicago
Korok Ray: Texas A&M University

Review of Accounting Studies, 2018, vol. 23, issue 2, No 7, 622-653

Abstract: Abstract This study defines reporting conservatism as a higher verification standard for probable gains compared to losses and builds a model that endogenously generates optimal behavior resembling an asymmetric preference for gains versus losses. Our model considers the setting where one party produces a resource and another tries to expropriate it. The key factor determining the extent of the gain-loss asymmetry is the level of information asymmetry or trust between the two parties. The information asymmetry-based results of our model provide a simpler explanation for the vast empirical literature on conservatism, where the bulk of the economic relationships among the parties appear to be information-based with little direct relation to explicit debt contracts, a factor that has been the focus of theoretical arguments. We also suggest new empirical analyzes.

Keywords: Conservatism; Information asymmetry; Evolution; Risk preferences (search for similar items in EconPapers)
JEL-codes: D91 G11 G41 (search for similar items in EconPapers)
Date: 2018
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DOI: 10.1007/s11142-018-9443-5

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