Implications of biased reporting: conservative and liberal accounting policies in oligopolies

Implications of biased reporting: conservative and liberal accounting policies in oligopolies We examine the effects of biased (conservative or liberal) reporting on product market competition. Cournot duopolists observe either firm-specific or industry-wide shocks and provide noisy reports subject to an exogenous mandated bias attributed to public policy. Given neutral prior beliefs, either a conservative bias or a liberal bias enhances overall reporting-system informativeness as measured by the reduction of uncertainty. Consistent with previously established effects in the information sharing literature regarding increases in informativeness, we show that expected industry profits and expected consumer surplus may gain or lose from bias, depending on whether the shocks are firm-specific or industry-wide and the degree of product competition. Expected social welfare, however, always increases in bias, irrespective of the source of uncertainty and product substitutability or complementarity. We next consider a setting where firms self-select whether to bias reports and characterize regions of potential conflict with a public policy that maximizes expected social welfare. Further results on the differential effects of conservative or liberal bias follow from relaxing the assumption of neutral prior beliefs. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Accounting Studies Springer Journals

Implications of biased reporting: conservative and liberal accounting policies in oligopolies

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Publisher
Springer US
Copyright
Copyright © 2015 by Springer Science+Business Media New York
Subject
Business and Management; Accounting/Auditing; Corporate Finance; Public Finance & Economics
ISSN
1380-6653
eISSN
1573-7136
D.O.I.
10.1007/s11142-015-9342-y
Publisher site
See Article on Publisher Site

Abstract

We examine the effects of biased (conservative or liberal) reporting on product market competition. Cournot duopolists observe either firm-specific or industry-wide shocks and provide noisy reports subject to an exogenous mandated bias attributed to public policy. Given neutral prior beliefs, either a conservative bias or a liberal bias enhances overall reporting-system informativeness as measured by the reduction of uncertainty. Consistent with previously established effects in the information sharing literature regarding increases in informativeness, we show that expected industry profits and expected consumer surplus may gain or lose from bias, depending on whether the shocks are firm-specific or industry-wide and the degree of product competition. Expected social welfare, however, always increases in bias, irrespective of the source of uncertainty and product substitutability or complementarity. We next consider a setting where firms self-select whether to bias reports and characterize regions of potential conflict with a public policy that maximizes expected social welfare. Further results on the differential effects of conservative or liberal bias follow from relaxing the assumption of neutral prior beliefs.

Journal

Review of Accounting StudiesSpringer Journals

Published: Sep 24, 2015

References

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