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Imprecision in Accounting Measurement: Can It Be Value Enhancing?
Author(s) -
KANODIA CHANDRA,
SINGH RAJDEEP,
SPERO ANDREW E.
Publication year - 2005
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/j.1475-679x.2005.00178.x
Subject(s) - profitability index , information asymmetry , investment (military) , agency (philosophy) , agency cost , value (mathematics) , accounting , ex ante , accounting information system , business , microeconomics , economics , investment value , key (lock) , finance , computer science , profit (economics) , corporate governance , philosophy , computer security , macroeconomics , epistemology , machine learning , politics , political science , law , shareholder
Accounting measurements of firms' investments are usually imprecise. We study the economic consequences of such imprecision when it interacts with information asymmetry regarding an investment project's ex ante profitability, known only by the firm's managers. Absent agency and risk‐sharing considerations, we find that some degree of accounting imprecision could actually be value enhancing. We characterize the optimal degree of imprecision and identify its key determinants. The greater the information asymmetry regarding the project's profitability, the greater is the imprecision that should be tolerated in the measurement of the firm's investment.