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Higher-Order Beliefs, Market-Based Incentives, and Information Quality


Chen, Hui; Wenning, Alexander (2024). Higher-Order Beliefs, Market-Based Incentives, and Information Quality. European Accounting Review, 33(2):569-587.

Abstract

We investigate how interdependence among investors' beliefs affects the reliance on market prices as a performance measure and how this in turn affects the firm's preference for financial reporting quality. When investors want to align their values more with other investors' beliefs, optimal contracts become more reliant on the accounting report and less on the market price, emphasizing the stewardship role of accounting in a herding market. If the baseline accounting quality required by a reporting standard is high enough, the firm prefers to increase its accounting quality for the sake of contracting efficiency. However, if the baseline quality is low, the firm further lowers accounting quality for the same reason. The benchmark level that determines whether the firm prefers to increase accounting quality increases with the interdependence of investors' beliefs, implying that it is difficult to align the information and stewardship roles of accounting in a herding market.

Abstract

We investigate how interdependence among investors' beliefs affects the reliance on market prices as a performance measure and how this in turn affects the firm's preference for financial reporting quality. When investors want to align their values more with other investors' beliefs, optimal contracts become more reliant on the accounting report and less on the market price, emphasizing the stewardship role of accounting in a herding market. If the baseline accounting quality required by a reporting standard is high enough, the firm prefers to increase its accounting quality for the sake of contracting efficiency. However, if the baseline quality is low, the firm further lowers accounting quality for the same reason. The benchmark level that determines whether the firm prefers to increase accounting quality increases with the interdependence of investors' beliefs, implying that it is difficult to align the information and stewardship roles of accounting in a herding market.

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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Business Administration
Dewey Decimal Classification:330 Economics
Scopus Subject Areas:Social Sciences & Humanities > Business and International Management
Social Sciences & Humanities > Accounting
Social Sciences & Humanities > Business, Management and Accounting (miscellaneous)
Social Sciences & Humanities > History
Physical Sciences > Engineering (miscellaneous)
Social Sciences & Humanities > Finance
Social Sciences & Humanities > Economics and Econometrics
Social Sciences & Humanities > Economics, Econometrics and Finance (miscellaneous)
Scope:Discipline-based scholarship (basic research)
Language:English
Date:14 March 2024
Deposited On:09 Mar 2023 08:35
Last Modified:28 Jun 2024 01:43
Publisher:Taylor & Francis
ISSN:0963-8180
Additional Information:CC BY-NC-ND 4.0
OA Status:Hybrid
Free access at:Publisher DOI. An embargo period may apply.
Publisher DOI:https://doi.org/10.1080/09638180.2022.2109706
Other Identification Number:merlin-id:23443
  • Content: Published Version
  • Language: English
  • Licence: Creative Commons: Attribution-NonCommercial-NoDerivatives 4.0 International (CC BY-NC-ND 4.0)