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An International Meeting of American Accounting
Association
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Conservatism and Accounting Information Quality |
Qintao Fan
Haas School of Business University of California at Berkeley
Xiao - Jun Zhang
University of California at Berkeley
Abstract: We study the optimal accounting policy when a firm can control the information quality through costly and uncontractable action. It is shown that the desirable accounting generally has two key featues:(i) the accounting report aggregates, rather than reporting directly, the raw information; (ii) the accounting has a conservative bias. Invoking the conservatism principle leads to inefficient inforamtion processing ex post. But it can improve information quality ex ante. We show that the desirability of conservative accounting depends on the degree of uncertainty associated with the underlying information. In addition it is shown that the information user's welfare decreases with a firm's private cost of information quality control and increases with a firm's private benefits from a more favorable report.