Internal Information systems, Competitors, Valuation

Responsibility accounting, Performance evaluation, Principle-agent model, Compensation

The paper analyzes the use of reported accounting earnings and price as a basis for compensating a manager when he trades on private information, and share price is set rationally based on privately held information, publicly available and contractible information, and publicly available but noncontractible information. In addition, we analyze the comparative statics of the compensation on reported earnings and price with respect to changes in the economy.

Stanley Baiman, Robert E. Verrecchia, The Relation Among Capital Markets, Financial Disclosure, Production Efficiency, and Insider Trading, Journal of Accounting Research, Vol. 34, No. 1 (Spring, 1996), pp. 1-22

Stanley Baiman, Barry L. Lewis, An Experiment Testing the Behavioral Equivalence of Strategically Equivalent Employment Contracts, Journal of Accounting Research, Vol. 27, No. 1 (Spring, 1989), pp. 1-20

Performance evaluation systems, Control system, Investigation region, Moral hazard

[The information furnished by management accounting systems aids top management in assessing the performance of lower levels and in setting proper incentives. These systems also provide information to lower levels which aids them in making operational decisions. Typically, detailed information is provided to lower levels in the organization, while only a summary of this information is furnished to top management. Therefore, in designing a management accounting system, a question arises as to the welfare effect of giving an employee access to detailed information, on which he can base his decisions, when such (detailed) information cannot be used in evaluating his performance. More generally, the question arises as to the welfare effects of increasing the informational asymmetry between upper and lower management by improving lower management's private pre-decision information system. Answering the above question can provide important insights into the proper design of firms' management accounting systems. We examine this issue using the principal-agent framework. In any given period, information reported in the managerial accounting system may be pre-decision or post-decision. When the system reports post-decision information and the contracts are complete, it is clear that the value of such information is non-negative. The value of pre-decision information is more difficult to assess. An agent who has access to better pre-decision information is able to use that information to make better decisions, given his objectives. However, the agent's objectives and the principal's objectives need not be the same. For example, the agent may use his better pre-decision information system to more successfully shirk on the job, making the principal strictly worse off. Thus, the principal is not necessarily better off by improving the agent's pre-decision information system. One way in which the principal can mitigate any negative effects of improving the agent's private pre-decision information system is to require the agent to communicate the private information. In this paper, we ignore the possibility of such communication. The reason for this is, as noted earlier, while large amounts of detailed information are provided to individuals at lower levels of the firm, only a small amount of that information is ever communicated to higher levels of the firm. Therefore, we view ignoring communication as an approximation. We examine a principal-agent model in which the principal can influence the extent to which the agent has superior private information on which the latter can base his action choice. We find sufficient conditions under which a strict Pareto improvement results from improving the agent's private pre-decision information system. This result arises because improving the agent's private pre-decision information system leads to improved coordination between the agent's information signal and action choice, which, in turn, results in an increase in the agent's average productivity. Although we do not find sufficient conditions under which a strict negative value might arise, we discuss some possible reasons and illustrate them with examples.]