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Properties of Economic Income in a Private Information Setting

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  • MITCHELL A. FARLEE
  • JOHN C. FELLINGHAM
  • RICHARD A. YOUNG

Abstract

. This paper adopts a valuation perspective within an asymmetric information setting and explores properties of economic income. The optimal intertemporal contract induces an accrual component of income which would not exist absent the information problem. The contracting solution introduces a dampening effect—if cash flow increases by one dollar, income increases by less than one dollar. Thus, the accrual is inversely related to cash flows. Further, this dampening is greater for more favorable cash outcomes. Résumé. Les auteurs adoptent la perspective de l'évaluation en situation d'asymétrie de l'information et explorent les propriétés du bénéfice économique. Le contrat intertemporel optimal fait intervenir une amplification du bénéfice qui n'existerait pas si ce n'était de la présence du problème d'information. La solution contractuelle amène un effet atténuateur — c'est†à †dire qu'à une augmentation du flux monétaire de un dollar correspond une augmentation du bénéfice de moins de un dollar. Ainsi, l'amplification est en relation inverse avec les flux monétaires. En outre, l'atténuation est plus marquée dans le cas de résultats monétaires plus avantageux.

Suggested Citation

  • Mitchell A. Farlee & John C. Fellingham & Richard A. Young, 1996. "Properties of Economic Income in a Private Information Setting," Contemporary Accounting Research, John Wiley & Sons, vol. 13(2), pages 401-422, September.
    • Handle: RePEc:wly:coacre:v:13:y:1996:i:2:p:401-422
    DOI: 10.1111/j.1911-3846.1996.tb00508.x
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    References listed on IDEAS

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    Cited by:

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    2. Jim Xie, 1996. "Accounting Research with Contracting Frictions," Contemporary Accounting Research, John Wiley & Sons, vol. 13(2), pages 423-433, September.
    3. Nikias, Anthony D. & Schwartz, Steven T. & Young, Richard A., 2009. "A note on bundling budgets to achieve management control," Journal of Accounting Education, Elsevier, vol. 27(3), pages 168-184.
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    5. Christian Daumoser & Bernhard Hirsch & Matthias Sohn, 2018. "Honesty in budgeting: a review of morality and control aspects in the budgetary slack literature," Journal of Management Control: Zeitschrift für Planung und Unternehmenssteuerung, Springer, vol. 29(2), pages 115-159, August.

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