TY - JOUR
T1 - Imprecision in accounting measurement
T2 - Can it be value enhancing?
AU - Kanodia, Chandra
AU - Singh, Rajdeep
AU - Spero, Andrew E.
PY - 2005/6
Y1 - 2005/6
N2 - Accounting measurements of firms' investments are usually imprecise. We study the economic consequences of such imprecision when it interacts with information asymmetry regarding an investment project's ex ante profitability, known only by the firm's managers. Absent agency and risk-sharing considerations, we find that some degree of accounting imprecision could actually be value enhancing. We characterize the optimal degree of imprecision and identify its key determinants. The greater the information asymmetry regarding the project's profitability, the greater is the imprecision that should be tolerated in the measurement of the firm's investment.
AB - Accounting measurements of firms' investments are usually imprecise. We study the economic consequences of such imprecision when it interacts with information asymmetry regarding an investment project's ex ante profitability, known only by the firm's managers. Absent agency and risk-sharing considerations, we find that some degree of accounting imprecision could actually be value enhancing. We characterize the optimal degree of imprecision and identify its key determinants. The greater the information asymmetry regarding the project's profitability, the greater is the imprecision that should be tolerated in the measurement of the firm's investment.
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U2 - 10.1111/j.1475-679X.2005.00178.x
DO - 10.1111/j.1475-679X.2005.00178.x
M3 - Article
AN - SCOPUS:20444450624
SN - 0021-8456
VL - 43
SP - 487
EP - 519
JO - Journal of Accounting Research
JF - Journal of Accounting Research
IS - 3
ER -