Management Accounting Section Midyear Meeting

Reliability-Relevance Trade Offs with an Attention-constrained Manager

• In Event: The Intersection of Managerial and Financial Accounting in Analytical Research

Abstract

We study the optimal aggregation of soft components in firms’ financial reports if such information is prone to manipulation. In this setting, standard setters face a trade off between relevance and reliability. We extend the existing literature assuming that managers must allocate their scarce attention to learn about the firm value or about aspects of the reporting environment that determine their misreporting costs. In contrast to an exogenous information endowment, accounting aggregation has strategic effects. We show that managerial attention allocation creates a tendency towards more extreme aggregation rules. Our results provide a theoretical foundation for the dichotomous distinction between principles-based and rules-based accounting standards. Moreover, the increasing quality of management information systems supports the implementation of reporting systems which offer managers additional discretion.

Authors

• Sebastian Fleer, University of Basel

• Ulrich Schaefer, University of Zurich