The Demand for Accounting Conservatism for Management Control

Young K. Kwon, D. Paul Newman () and Yoon S. Suh
Additional contact information
Young K. Kwon: University of Illinois
D. Paul Newman: University of Texas
Yoon S. Suh: Ajou University

Review of Accounting Studies, 2001, vol. 6, issue 1, No 3, 29-52

Abstract: Abstract We show that conservative financial reporting arises naturallyin principal-agent settings as a means of efficiently motivating agentswhen the penalties that can be imposed on agents are limited. Weconsider an accounting system whose reports are used for contracting andwhose parameters are controlled by the principal. One advantage of our model is that the information system we describe has the accountingcharacteristic of mapping unbiased underlying information about the firminto a reduced message space. The principal can choose how that mappingoperates, i.e., conservatively, liberally, or neutrally. When penaltiesare sufficiently limited (a limited liability setting), we show that theaccounting system designed by the principal is always conservative. Alternatively, in an unlimited liability setting, any bias in the systemdepends on random circumstances, and we would not expect accountingconservatism to arise as a pervasive and enduring phenomenon.

Keywords: accounting conservatism; moral hazard; limited liability (search for similar items in EconPapers)
Date: 2001
References: Add references at CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1023/A:1011330003876 Abstract (text/html)
Access to the full text of the articles in this series is restricted.

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:spr:reaccs:v:6:y:2001:i:1:d:10.1023_a:1011330003876

Ordering information: This journal article can be ordered from
http://www.springer.com/accounting/journal/11142

DOI: 10.1023/A:1011330003876

Access Statistics for this article

Review of Accounting Studies is currently edited by Paul Fischer

More articles in Review of Accounting Studies from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().