On the Optimal Relation between the Properties of Managerial and Financial Reporting Systems |
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| Authors: | THOMAS HEMMER EVA LABRO |
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| Institution: | 1. University of Houston;2. London School of Economics. We gratefully acknowledge comments and/or suggestions by Doug Skinner (the editor), an anonymous referee, Michael Bromwich, Frank Gigler, Jon Glover, Evelyn Korn, Christian Leuz, Brian Mittendorf, Mark Penno, Ana Simpson, Mary Stanford, Rick Young, Jerry Zimmerman and participants in the: Yale SOM Accounting Research Conference, Accounting Research Day Antwerp, Lone Star Conference SMU, Freiburg Accounting Research Conference, 2007 American Accounting Association Annual Meeting, 2007 Chicago‐Minnesota accounting theory conference, 2008 MAS midyear meeting as well as workshops at Aarhus University, Duke University, Instituto de Empresa Madrid, LSE, NHH Bergen, Ohio State, Rotman School of Management Toronto, Rotterdam School of Management, Texas A&M, Trento University, University of Houston and WHU Otto Beisheim School of Management Vallendar. |
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| Abstract: | We develop a theoretical model of the firm that links properties (stewardship vs. valuation focus) of financial reporting regimes with the informational properties of optimal managerial accounting systems. We show that, contrary to the standard textbook proposition, properties of management and financial accounting systems are not independent. Significantly, we provide an explicit connection between exogenous and observable properties of a firm's financial reporting system and the quality of the managerial accounting system on which manager(s) base real economic decisions. As the quality of those economic decisions can also be inferred from publicly available data, our theory generates new opportunities for empirical managerial accounting research on large nonproprietary samples. Further, by being able to identify enhanced performance due to improved managerial accounting information, our theory provides opportunities to gain a better understanding of the link between particular managerial accounting practices and the quality of the information produced. |
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