Multiple Uses of Accounting Information

Abstract

This paper presents an analytical model to study the trade- offs that managers face when they use accounting signals for multiple uses. We analyze the situation where a signal is informative about the agent's effort (and hence useful for contracting with the agent) and about the attractiveness of an investment proposal. We find that the principal will be better off by using the signal less intensively for performance evaluation (compared to the case without investment decision) in order to obtain a better information for her investment decision if:(1) the agent can manipulate the signal, (2) either manipulation cannot be communicated to the principal or the principal cannot commit not to use the information communicated against the agent, and (3) the principal cannot delegate the investment decision to the agent. If these assumptions do not hold, however, the principal would prefer to let the agent manipulate and extract high effort.

JEL Classification: D82, M40, M43