Economics of Accounting

by Christensen, Peter Ove; Feltham, Gerald A.

• ISBN13: 9781402072291
• ISBN10: 1402072295
• Format: Hardcover
• Copyright: 2003-01-01
• Publisher: Kluwer Academic Pub

Summary

Economics of Accounting: Information in Markets examines the fundamentals of a variety of economic analyses of the decision-facilitating and decision-influencing roles of information that are pertinent to the study of the economic impact of accounting. While much of information economic analysis makes no explicit reference to accounting, many generic results apply to accounting reports. Furthermore, the impact of accounting reports depends on the other information received by the economy's participants. Hence, it is essential that accounting researchers have a broad understanding of the impact of publicly reported information within settings in which there are multiple sources of public and private information.The focus in this volume is on the decision-facilitating role of information, with emphasis on the impact of public and private information on the equilibria and investor welfare in capital and product markets.

Table of Contents

Foreword	xv
Joel S. Demski
Preface	xvii
Introduction to Information in Markets	1	(28)
Basic Decision-facilitating Role of Information	2	(4)
Public Information in Equity Markets	6	(8)
Impact of Public Information in Pure-exchange Setting	6	(1)
Impact of Public Information in a Production Choice Setting	7	(2)
Market Values and Accounting Information	9	(5)
Private Investor Information in Equity Markets	14	(4)
Disclosure of Private Owner Information in Equity and Product Markets	18	(6)
Disclosure by a Risk-averse Owner	19	(2)
Disclosure on Behalf of Risk-neutral Owners	21	(2)
Disclosure in a Duopoly	23	(1)
Concluding Remarks	24	(5)
PART A BASIC DECISION-FACILITATING ROLE OF INFORMATION
Single Person Decision Making under Uncertainty	29	(42)
Representation of Uncertainty	30	(3)
Random Variables	33	(5)
Representation of Preferences	38	(5)
Risk Aversion	43	(6)
HARA Utility Functions	49	(2)
Mean-variance Preferences	51	(5)
Basic Hurdle Models	56	(4)
Stochastic Dominance	60	(11)
Appendix 2A: Proofs of Stochastic Dominance Propositions	66	(3)
Appendix 2B: One-parameter Exponential Family of Distributions	69	(1)
References	70	(1)
Decision-Facilitating Information	71	(40)
Representation of Information	72	(9)
Conditional Probability	72	(2)
Posterior Beliefs with Random Variables	74	(3)
Multi-variate Normal Distributions	77	(1)
Sufficient Statistics	78	(3)
Value of Decision-facilitating Information Systems	81	(12)
Partitions and Measurable Functions	81	(3)
Basic Information Economic Model	84	(6)
Value of Information	90	(3)
Comparison of Information Systems	93	(8)
Generally at Least as Valuable Information Systems	93	(1)
Informativeness	94	(7)
Impact of Risk and Risk Aversion on the Value of Information	101	(10)
Financial Investment Example	101	(3)
The Hurdle Model	104	(2)
Appendix 3A: Expected Values of Exponential Functions with Normal Distributions	106	(2)
References	108	(3)
Risk Sharing, Congruent Preferences, and Information in Partnerships	111	(32)
Efficient Risk Sharing	112	(14)
Efficient Risk Sharing with Homogeneous Beliefs	112	(10)
HARA Utility Functions and Linear Risk Sharing	122	(3)
Side-betting with Heterogeneous Beliefs	125	(1)
Congruent Preferences	126	(9)
Action Choice	127	(5)
Information System Choice	132	(3)
Distributed Information in Teams	135	(8)
Appendix 4A: Congruent Preferences with Exponential Utility and Heterogeneous Beliefs	136	(3)
References	139	(4)
PART B PUBLIC INFORMATION IN EQUITY MARKETS
Arbitrage and Risk Sharing in Single-period Markets	143	(42)
Market Value Implications of No Arbitrage	144	(8)
Basic Elements of the Single-period Models	144	(1)
No Arbitrage in Single-period Markets	145	(4)
Alternative Representations of No-arbitrage Prices	149	(3)
Optimal Portfolio Choice	152	(2)
Market Equilibrium and Efficient Risk Sharing	154	(7)
Effectively Complete Markets	161	(14)
Linear Risk Sharing	161	(4)
Diversifiable Risks	165	(10)
Impact of Public Information	175	(6)
Ex Post Information	176	(4)
Ex Ante Information	180	(1)
Concluding Remarks	181	(4)
References	182	(3)
Arbitrage and Risk Sharing in Multi-period Markets	185	(38)
Market Value Implications of No Arbitrage in Multi-period Settings	186	(10)
Basic Elements of the Multi-period Model	186	(2)
No Arbitrage in Multi-period Markets	188	(4)
Alternative Representations of No-arbitrage Prices	192	(4)
Optimal Portfolio Plans	196	(5)
Equilibrium and Efficient Risk Sharing	201	(5)
Effectively Dynamically Complete Markets	206	(12)
Linear Risk Sharing	206	(3)
Diversifiable Risks	209	(9)
Concluding Remarks	218	(5)
Appendix 6A: Risk-neutral Probabilities Based on the Return on a Bank Account	219	(2)
References	221	(2)
Public Information in Multi-period Markets	223	(30)
Efficiency of Information Systems	224	(4)
Impact of Public Information in Securities Markets	228	(5)
Information and Prices	233	(3)
Information and Trades	236	(2)
Exponential Utility and Normally Distributed Dividends	238	(7)
Investor Portfolio Choice	238	(2)
Equilibrium Prices and Investment Portfolios	240	(3)
Impact of Public Information	243	(2)
Concluding Remarks	245	(8)
Appendix 7A: Value of Additional Information	246	(5)
References	251	(2)
Production Choice in Efficient Markets	253	(24)
Production Alternatives and Efficiency	254	(5)
Efficient Production Choice with Private Ownership	259	(3)
Complete Multi-period Securities Markets	259	(1)
Dynamically Complete Securities Markets	260	(2)
Impact of Public Information	262	(3)
Efficient Production Choice in Two-period Economies	265	(7)
Basic Two-period Model	265	(1)
Impact of Additional Information	266	(2)
Production Choice in a Dynamically Quasi-complete Market	268	(1)
Information and Firm Value in a Dynamically Quasi-complete Market	269	(1)
The Value of Windfall and Productivity Information	269	(2)
Optimal Behavior when Managers have Private Firm-specific Information	271	(1)
Concluding Remarks	272	(5)
References	274	(3)
Relation Between Market Values and Future Accounting Numbers	277	(38)
No-arbitrage Accounting-value Relations	279	(7)
Clean Surplus Relation	279	(2)
Accounting-value Relation	281	(2)
Alternative Accounting-value Relations	283	(3)
Separation of Financial and Operating Activities	286	(5)
Accounting Relations	287	(2)
Operating Income-value Relation	289	(1)
Operating Cash Flow-value Relation	290	(1)
Truncated Forecasts	291	(2)
Anticipated Equity Transactions	293	(12)
Pure- Versus Mixed-equity Concepts	294	(1)
Accounting Valuation Model	295	(1)
Accounting for the Issuance of New Equity	296	(6)
Treating Contingent Claims as Debt	302	(2)
Per-share Calculations	304	(1)
Concluding Remarks	305	(10)
Appendix 9A: Tax Effects	306	(1)
Distribution of Earnings and Contributed Capital	307	(2)
Differential Taxes on Dividends and Interest	309	(2)
References	311	(4)
Relation Between Market Values and Contemporaneous Accounting Numbers	315	(52)
Some Basics of Dynamic Models	319	(11)
Stationary Dividend-value Relation	319	(2)
A General Linear Dividend Valuation Model	321	(2)
A Simple Auto-regressive Dividend Model	323	(3)
Stationary Accounting-value Relations	326	(4)
A Capital Investment Model	330	(19)
Capital Investment and Depreciation	330	(9)
Information and Accounting Accruals	339	(4)
Inferring Information from Analysts' Forecasts	343	(6)
Other Factors Influencing Accounting-value Relations	349	(9)
Transitory Earnings and Investments	349	(3)
Receivables and Bad Debt Expense	352	(4)
Research and Development	356	(2)
Concluding Remarks	358	(9)
Appendix 10A: Proofs	360	(1)
References	361	(6)
PART C PRIVATE INVESTOR INFORMATION IN EQUITY MARKETS
Impact of Private Investor Information in Equity Markets	367	(52)
Revelation of Private Investor Information Through Prices	369	(8)
Unsophisticated Versus Fully Informed Equilibria	369	(5)
Rational Expectations Equilibria	374	(1)
Expected Utility from Competitive Acquisition of Risk	375	(2)
Acquisition of Private Information by Price-taking Investors	377	(11)
Exogenous Set of Informed Investors	378	(3)
Endogenous Information Acquisition	381	(7)
Public Reports and the Concurrent Demand for Private Information	388	(9)
Public Reports and the Prior Demand for Private Information	397	(12)
Concluding Remarks	409	(10)
Appendix 11A: Private Information in a Complete Market	410	(4)
Appendix 11B: Proofs	414	(2)
References	416	(3)
Strategic Use of Private Investor Information in Equity Markets	419	(28)
The Basic Strategic Investor Model	420	(4)
Exogenous Informativeness of the Private Signal	421	(2)
Endogenous Informativeness of the Private Signal	423	(1)
Public Reports and the Concurrent Demand for Private Information	424	(13)
Multiple Informed Investors	424	(7)
Private Investor Information in an Infinite Horizon, Residual Income Model	431	(3)
Endogenous Informativeness of the Public Report	434	(3)
Public Reports and the Prior Demand for Private Information	437	(6)
Concluding Remarks	443	(4)
References	443	(4)
PART D DISCLOSURE OF PRIVATE OWNER INFORMATION IN EQUITY AND PRODUCT MARKETS
Disclosure of Private Information by an Undiversified Owner	447	(54)
Basic Disclosure Issues	448	(4)
Equilibria in Disclosure Games	452	(14)
Sequential Equilibria	453	(1)
A Simple Risk-sharing Example	454	(5)
Stable Equilibria	459	(7)
Signaling with Outcome-contingent Contracts	466	(14)
Outcome-contingent Contracts with Finite Sets of Outcomes and Signals	467	(4)
Equity Retention with Normally Distributed Outcomes	471	(4)
Correlated Outcomes among Firms	475	(5)
Verified Ex Ante Reports	480	(12)
Perfect Ex Ante Reports	480	(3)
Imperfect Ex Ante Reports	483	(9)
Verified Ex Post Reports	492	(2)
Equity Retention and Report Choice as Bivariate Signals	494	(2)
Concluding Remarks	496	(5)
Appendix 13A: Optimal Contracts in the LP-Model	497	(2)
References	499	(2)
Disclosure of Private Information by Diversified Owners	501	(42)
Some Basic Disclosure Model Elements and Issues	501	(5)
Verifiable Disclosure to One Recipient	506	(10)
Full Disclosure with Costless Verification	507	(4)
Partial Disclosure with Costly Verification	511	(5)
Verifiable Disclosure to Two Recipients	516	(6)
New Equity/Potential Entrant Model	517	(3)
Other Two-recipient Models	520	(2)
Positive Probability the Manager is Uninformed	522	(13)
Single Recipient Models	523	(4)
Litigation	527	(4)
Endogenous Information Acquisition	531	(1)
Endogenous Investment Choice	532	(3)
Unverified Disclosure to Two Recipients	535	(4)
Concluding Remarks	539	(4)
References	539	(4)
Disclosure of Private Information in Product Markets	543	(38)
Ex Ante Disclosure Policies	545	(22)
Cournot Competition	547	(8)
Bertrand Competition	555	(5)
Discussion and Extension of Results	560	(7)
Ex Post Disclosure Choices	567	(9)
The Basic Ex Post Disclosure Model	568	(3)
Positive Probability Manager i is Uninformed	571	(1)
New Equity Model	572	(4)
Concluding Remarks	576	(5)
References	578	(3)
Author Index	581	(4)
Subject Index	585