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Imprecision in Accounting Measurement: Can it be Value Enhancing?

44 Pages Posted: 25 Jul 2001  

Chandra Kanodia

University of Minnesota - Carlson School of Management

Rajdeep Singh

University of Minnesota - Twin Cities - Carlson School of Management

Andy Spero

Multiple version iconThere are 2 versions of this paper

Date Written: May 2004

Abstract

Accounting measurements of firms' investments are usually imprecise. We study the economic consequences of such imprecision in a setting where accounting imprecision interacts with information asymmetry regarding the ex ante profitability of the project that is privately known by the firm's managers. Absent agency and risk sharing considerations, we find that some degree of accounting imprecision could actually be value enhancing. We characterize the optimal degree of imprecision and identify its key determinants. The greater the information asymmetry about the project's profitability, the greater is the imprecision that should be tolerated in the measurement of the firm's investment.

Keywords: Noisy signaling, Accounting Imprecision, Investment incentives

JEL Classification: D82, G31, L10, M41

Suggested Citation

Kanodia, Chandra and Singh, Rajdeep and Spero, Andy, Imprecision in Accounting Measurement: Can it be Value Enhancing? (May 2004). Available at SSRN: https://ssrn.com/abstract=275668 or http://dx.doi.org/10.2139/ssrn.275668

Chandra Kanodia

University of Minnesota - Carlson School of Management ( email )

321 19th Avenue South
674 Management and Economics
Minneapolis, MN 55455
United States
612-624-6880 (Phone)
612-626-7795 (Fax)

Rajdeep Singh (Contact Author)

University of Minnesota - Twin Cities - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States
612-624-1061 (Phone)
612-626-1335 (Fax)

HOME PAGE: http://umn.edu/~rajsingh

No contact information is available for Andrew E. Spero

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