Asymmetric Monitoring: Good Versus Bad News Verification
Schmalenbach Business Review, Vol. 56, 2004
17 Pages Posted: 9 Mar 2005
We analyze a principal-agent setting with multiple sources of contracting information in which the signal from each source can be unmistakably interpreted as "good" or "bad" news. We then ask whether it is best to condition the acquisition of one of the information sources on whether the earlier reporting source has reported "good" or "bad" news. That is, is it efficient to "chase the good news" or to "chase the bad news"? The answer depends on whether the earlier source is publicly observed or self-reported by the agent. We also explore ties to institutional features, and in particular conservative accounting treatments.
Keywords: Agency, Asymmetric Monitoring, Conservative Accounting
JEL Classification: D82, M40, M55
Suggested Citation: Suggested Citation