Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/177274 
Year of Publication: 
2017
Citation: 
[Journal:] Business Research [ISSN:] 2198-2627 [Volume:] 10 [Issue:] 2 [Publisher:] Springer [Place:] Heidelberg [Year:] 2017 [Pages:] 189-213
Publisher: 
Springer, Heidelberg
Abstract: 
We consider a two-period LEN-type agency problem. The principal needs to implement one out of two accounting systems. One emphasizes relevance, the other reliability. Both systems produce identical inter-temporally correlated signals. The relevant system reports an accounting signal in the period in which it is produced. The reliable system reports a more precise signal, but with a one period delay. Accounting information is contractible only if it is reported within the two-period horizon of the game. Accordingly, accounting information produced in the second period becomes uncontractible with the reliable system in place. Non-accounting information needs to be used for contracting to provide any second period incentives at all.Wederive optimal compensation contracts in a full and in a limited commitment setting. With full commitment, the reliable system trades-offmore precise first and less precise second-period contractible information, as compared to the relevant system. If the reduction of noise in the accounting signals is strong and the distortion in the non-accounting measure is weak, the reliable system is preferred. With limited commitment we identify a similar trade-off if intertemporal correlation of the signals is negative. If it is positive, this tradeoff might reverse: The reliable system is possibly preferred if noise reduction is small and the non-accounting measure is heavily distorted. Noisiness in performance measures then serves as a commitment device. It reduces otherwise overly high powered incentives and thus benefits the principal.
Subjects: 
Accounting information
Agency-problem
Limited commitment
Timeliness
JEL: 
M4
D8
C7
Persistent Identifier of the first edition: 
Creative Commons License: 
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Document Type: 
Article

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