I develop a dynamic principal-agent framework to examine the role of accounting information in a long-term contracting relationship with uncertainty over fundamental performance. Using this model, I characterize the marginal impact of accounting information on intertemporal incentive provision in the face of other sources of information. Cash flows and realizations of an accounting measurement system provide imperfect signals of unobservable firm fundamentals. Accounting information increases the rate at which the principal's beliefs over fundamentals match those of the agent's, above and beyond the impact of cash flows, thereby mitigating the difficulty in providing intertemporal incentives that is induced by uncertainty. The belief matching process and the reversal property embedded in the accounting system give rise to an endogenous demand for long-term incentives, and measurement precision directly influences the necessary path-dependence of these incentives over the course of the contractual relationship. Furthermore, equilibrium manipulation of the accounting report becomes increasingly positive as the agency approaches termination. My framework allows for falsifiable empirical predictions regarding the relationship between the properties of accounting measurement and managerial turnover, the evolving nature of incentives over the manager's tenure, managerial risk-taking activity, and the use of performance-vesting incentives.
|Status||Under udarbejdelse - 2020|