Phillip C. Stocken
Dartmouth College
Robert E. Verrecchia
University of Pennsylvania
Abstract: We examine the efficiency implications of an entrepreneur's financial reporting system choice and disclosure management. When an entrepreneur has some private information that is not captured by a firm's financial reporting system and may manipulate the financial report at some cost, we show that the entrepreneur may not choose the most precise financial reporting system. We examine how reporting system choice varies with the precision of entrepreneur's private information captured by the reporting system, precision of information that is not captured by the reporting system, and the entrepreneur's cost of manipulating the report. We consider the effect of reporting discretion on the efficiency with which investors allocate resources.
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