Do Productivity and Accounting Quality Increase with More Conservative Performance Measures?

Accounting and Management Control

Speaker: Alfred Wagenhofer (University of Graz)

HEC Campus - Build.T - Room 022

Abstract:

 We examine how a manager can be induced to improve the accounting quality (AQ) of financial reports that are used for measuring management performance. We find that a more conservative accounting system increases incentives to invest in AQ and always strictly increases firm value. When the incentives are too low for the manager to exert AQ effort, conservatism reduces the expected compensation while keeping productive incentives intact. In the optimum, it is optimal to increase compensation and elicit more productive effort. When the manager does exert AQ effort, then the owner reduces compensation with more conservatism and foregoes some productivity gains, but firm value still increases due to the increased AQ. Overall, AQ incentives and firm value strictly increase with conservatism; total welfare is typically maximal at the degree of conservatism where the regimes switch. We also show that AQ is more important in firms with greater productivity.