Accounting conservatism and relational contracting
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2023-08-01
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This paper develops a positive role for accounting conservatism in fostering relational contracts between two agents in a two-period model of moral hazard. Building on Kreps (1996), the principal in our model designs a conservative measurement system and optimal contracts to create multiple equilibria that foster a team-based corporate culture. Accruals introduced by conservatism increase each agent's stake in the future of the relationship when it matters most—when it is going badly. This makes staying in the relationship worthwhile for the agents, even if they plan to play a low payoff equilibrium in the second period to punish first-period free-riding. In turn, this allows the principal to use lower-powered (and less costly) team incentives in the first period of the relationship. In contrast, deferred compensation increases each agent's stake in the future of the relationship when it is going well, making it less efficient in fostering relationships.
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Glover, J, and H Xue (2023). Accounting conservatism and relational contracting. Journal of Accounting and Economics, 76(1). pp. 101571–101571. 10.1016/j.jacceco.2022.101571 Retrieved from https://hdl.handle.net/10161/32348.
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Hao Xue
Hao Xue is an Associate Professor of Accounting. Prior to joining Fuqua, Professor Xue was an Assistant Professor at New York University, Stern School of Business. Professor Xue's research applies analytical models to accounting practices and institutions that conventional thinkings may have difficulties explaining. In a recent work, he studies the effect of investors' private word-of-mouth communications on firms' information environment and how firms adjust their disclosures in response. Professor Xue teaches Managerial Accounting.
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