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Accounting Policies in Agencies with Moral Hazard and Renegotiation
Author(s) -
Christensen Peter Ove,
Demski Joel S.,
Frimor Hans
Publication year - 2002
Publication title -
journal of accounting research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 6.767
H-Index - 141
eISSN - 1475-679X
pISSN - 0021-8456
DOI - 10.1111/1475-679x.00082
Subject(s) - audit , moral hazard , rationing , earnings , business , agency (philosophy) , accounting , action (physics) , earnings management , accounting information system , actuarial science , economics , incentive , microeconomics , epistemology , quantum mechanics , economic growth , health care , philosophy , physics
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.