Implications of Biased Reporting: Conservative and Liberal Accounting Policies in Oligopolies

38 Pages Posted: 28 Feb 2013 Last revised: 19 May 2016

See all articles by Henry L. Friedman

Henry L. Friedman

University of California, Los Angeles (UCLA) - Accounting Area

John S. Hughes

University of California at Los Angeles

Richard E. Saouma

David Eccles School of Business; MSU

Date Written: May 26, 2015

Abstract

We examine the effects of biased (conservative or liberal) reporting on product market competition. Cournot duopolists observe either firm-specific or industry-wide shocks and provide noisy reports subject to an exogenous mandated bias attributed to public policy. Given neutral prior beliefs, either a conservative bias or a liberal bias enhances overall reporting-system informativeness as measured by the reduction of uncertainty. Consistent with previously established effects in the information sharing literature regarding increases in informativeness, we show that expected industry profits and expected consumer surplus may gain or lose from bias, depending on whether the shocks are firm-specific or industry-wide and the degree of product competition. Expected social welfare, however, always increases in bias, irrespective of the source of uncertainty and product substitutability or complementarity. We next consider a setting where firms self-select whether to bias reports and characterize regions of potential conflict with a public policy that maximizes expected social welfare. Further results on the differential effects of conservative or liberal bias follow from relaxing the assumption of neutral prior beliefs.

Keywords: Conservatism, Optimal Information Systems, Cournot, Duopoly

Suggested Citation

Friedman, Henry L. and Hughes, John S. and Saouma, Richard E., Implications of Biased Reporting: Conservative and Liberal Accounting Policies in Oligopolies (May 26, 2015). Review of Accounting Studies, Vol. 21, No. 1, 2016. Available at SSRN: https://ssrn.com/abstract=2226141 or http://dx.doi.org/10.2139/ssrn.2226141

Henry L. Friedman (Contact Author)

University of California, Los Angeles (UCLA) - Accounting Area ( email )

D416 Anderson Complex
Los Angeles, CA 90095-1481
United States

John S. Hughes

University of California at Los Angeles ( email )

D410 Anderson Complex
Los Angeles, CA 90095-1481
United States
310-794-9553 (Phone)
310-267-2193 (Fax)

Richard E. Saouma

David Eccles School of Business ( email )

1645 E Campus Center Dr
Salt Lake City, UT 84112-9303
United States

MSU ( email )

East Lansing, MI 48824-1121
United States

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