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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.

Inhaltsverzeichnis

Frontmatter

Introduction to Information in Markets

Chapter 1. Introduction to Information in Markets

Abstract
In their book on cost deterination, Demski and Feltham (1977) characterize accounting as playing both decision-facilitating and decision-influencing roles within organizations. In its decision-facilitating role accounting reports provide information that affects a decision maker’s beliefs about the consequences of his actions, and accounting forecasts may be used to represent the predicted consequences. On the other hand, in its decision-influencing role, anticipated accounting reports pertaining to the consequences of a decision maker’s actions may influence his action choices (particularly if his future compensation will be influenced by those reports).
Peter O. Christensen, Gerald A. Feltham

Basic Decision-Facilitating Role of Information

Frontmatter

Chapter 2. Single Person Decision Making under Uncertainty

Abstract
If there is no uncertainty, there is no role for information. Hence, any examination of the role of accounting information in markets and organizations must recognize that decision makers face uncertainty about the consequences of their actions. In this chapter we summarize some key elements of the representation of uncertainty and decision maker preferences under uncertainty. The representation of information and its decision-facilitating role is introduced in Chapter 3. Chapters 2 and 3 consider settings with a single decision maker, while Chapter 4 considers a setting with multiple decision makers, and it introduces the key concepts of efficient risk sharing, and congruent preferences over actions.
Peter O. Christensen, Gerald A. Feltham

Chapter 3. Decision-Facilitating Information

Abstract
An accounting system potentially reports information to decision makers. Consequently, to understand the economic role of accounting systems it is useful to understand the economic role of information systems. In our basic economic model of decision making, the decision maker faces uncertainty about the outcomes from his actions. We generally view information as a mechanism for reducing uncertainty, and in single-person decision making the reduction of outcome uncertainty has economic value (which may or may not exceed its costs) if it influences the decision maker’s action choices. Hence, the key characteristic of an information system is how the signals (information) it generates affect the decision maker’s beliefs about outcome relevant events.
Peter O. Christensen, Gerald A. Feltham

Chapter 4. Risk Sharing, Congruent Preferences, and Information in Partnerships

Abstract
Chapters 2 and 3 focus on decision making under uncertainty by a single decision maker. In the remainder of the book all analyses consider settings in which there are multiple decision makers. This chapter considers a simple setting that we call a partnership, although in the literature it is often called a syndicate (e.g., Wilson, 1968). The key concepts introduced are efficient risk sharing and congruent preferences for action and information system choices.
Peter O. Christensen, Gerald A. Feltham

Public Information in Equity Markets

Frontmatter

Chapter 5. Arbitrage and Risk Sharing in Single-Period Markets

Abstract
In Chapter 4 we consider the use of a sharing rule (i.e., a contract) to efficiently share a partnership’s aggregate uncertain outcome among its members. We now consider risk sharing and market prices in a competitive financial market in which investors share the economy’s risky aggregate outcome by means of trading in securities, with investors taking the market prices as given.
Peter O. Christensen, Gerald A. Feltham

Chapter 6. Arbitrage and Risk Sharing in Multi-Period Markets

Abstract
This chapter extends the single period analysis in the prior chapter to a setting with multiple consumption dates and sequential trading of long-lived securities. The information system publicly reports a signal at each date. It is taken as given in this chapter, whereas in Chapter 7 we explore the impact of varying the public information system. Both Chapters 6 and 7 continue to examine pure exchange settings, i.e., production choice is exogenous and independent of the information system. However, in Chapter 8 we consider settings with endogenous production choices.
Peter O. Christensen, Gerald A. Feltham

Chapter 7. Public Information in Multi-Period Markets

Abstract
Chapter 6 extends the single period analysis in Chapter 5 to a setting with multiple consumption dates and sequential trading of long-lived securities. This provides greater scope for exploring the impact of public information.
Peter O. Christensen, Gerald A. Feltham

Chapter 8. Production Choice in Efficient Markets

Abstract
In the pure exchange models considered in Chapters 5, 6, and 7, the dividends associated with each marketed security are taken as given. The sequence of event-contingent dividends paid by a firm can be viewed as representing that firm’s production plan and its dividend (financing) policy. In this chapter we explicitly consider the choice of production plans.
Peter O. Christensen, Gerald A. Feltham

Chapter 9. Relation between Market Values and Future Accounting Numbers

Abstract
In the preceding chapters, the value of a marketed security is represented as the net present value of risk-adjusted expected dividends. The expectations change with the information received by investors, and accounting reports could be a source of that information. Furthermore, even if accounting reports are not the source, accounting numbers may be used in representing investor information. However, the representations used in prior chapters are abstract and provide little direct insight as to how accounting numbers relate to market values.
Peter O. Christensen, Gerald A. Feltham

Chapter 10. Relation between Market Values and Contemporaneous Accounting Numbers

Abstract
There is a broad interest in the relation between the market value of a firm’s common equity and the accounting numbers reported by the firm. For example, virtually every business school has a course in financial statement analysis for valuation purposes, and both investors and analysts consider the information in accounting reports when making investment decisions or recommendations. Furthermore, there are a large number of empirical studies in which accounting researchers examine this relation. We do not try to summarize or provide specific references to this literature, but we note that there is a significant subset of this research that seeks to understand how market values relate to contemporaneous accounting numbers.1 In some cases, the studies assume that, or explore whether, the accounting reports are a source of investor information, whereas in other studies the accounting numbers are merely viewed as representations of investor information.
Peter O. Christensen, Gerald A. Feltham

Private Investor Information in Equity Markets

Frontmatter

Chapter 11. Impact of Private Investor Information in Equity Markets

Abstract
Part B (Chapters 5 through 10) considers the impact of public information in competitive capital markets in which all investors receive the same information and are price takers. Part C (Chapters 11 and 12) considers the impact of private investor information and non-price taking behavior. Why are we interested in private investor information? As accounting researchers we are not interested in private information per se, but we have a particular interest in the interactive effect of public reports and private investor information. For example, it is widely recognized that investors often know much of the information content in an accounting report before it is released. One reason for this is that investors may have acquired that information privately before it is released. The major gain from private information comes from going long or short in a firm’s shares immediately before the release of a public report that causes the price to increase or decrease (and then reversing the position after the information is impounded in the price). Thus, intuitively, one expects investor demand for private information to increase immediately prior to an anticipated public report. Hence, a key question is how the informativeness of the accounting system affects the prior acquisition of private information. In addition, the timely release of earnings forecasts and other management information may reduce the incremental informativeness of a private signal and, thus, reduce the incentive to acquire the private signal.
Peter O. Christensen, Gerald A. Feltham

Chapter 12. Strategic Use of Private Investor Information in Equity Markets

Abstract
In the GS (and HV) models examined in Chapter 11, the informed investors are assumed to act as price takers when they trade on their private information. The investors rationally anticipate the relation between the private information and the equilibrium price, but nonetheless they ignore the effect their trades will have on the information conveyed to uninformed investors through the resulting price. If there are many competing investors who become informed and their individual actions have a relatively small impact on the price, this is a reasonable assumption. Risk aversion plays a key role in these models as it determines how aggressively the informed investors react to their private information. In other settings there are only a few investors, such as insiders, who become informed. Even if they are risk neutral, they may well restrain their trades so as to partially “hide” their private information while still making a profit from its use in their trades.
Peter O. Christensen, Gerald A. Feltham

Disclosure of Private Owner Information in Equity and Product Markets

Frontmatter

Chapter 13. Disclosure of Private Information by an Undiversified Owner

Abstract
In Chapter 7 we consider the impact of public information in an equity market under pure exchange. The firms’ managers are ignored since their production decisions are assumed to be fixed, and they are assumed to play no role in determining the information publicly reported to investors. Investors, on the other hand, trade claims to implement their consumption plans and those trades, as well as the market prices of the traded claims, are endogenously determined. The public information system is exogenously specified, and the system specified may influence the investors’ consumption plans. However, a key result from Chapter 7 is that an anticipated change in the public information system has no impact on the investors’ consumption plans (and, hence, their expected utility) if they have homogeneous beliefs, time-additive preferences, and insurable consumption endowments. This result holds even though the trades used to implement the consumption plans, and the market prices, may be influenced by the information system.
Peter O. Christensen, Gerald A. Feltham

Chapter 14. Disclosure of Private Information by Diversified Owners

Abstract
Chapter 13 examines disclosure of private information by a risk-averse owner of a firm who seeks to raise capital from, and share firm-specific risks with, well-diversified investors. We now consider a firm whose shares have been previously traded so that they are owned by well-diversified investors. We assume that the firm is operated by a manager who is exogenously motivated to act in the best interests of the firm’s current owners. That is, as in Chapter 8, the manager is effectively an automaton, so that there are no incentive issues. In Volume II we consider agency theory models in which management incentives (including the incentives to reveal private information) are endogenous. The models in this chapter are generally called “disclosure models.”1
Peter O. Christensen, Gerald A. Feltham

Chapter 15. Disclosure of Private Information in Product Markets

Abstract
Chapter 14 examines the disclosure of private information by a manager acting on behalf of well-diversified owners. The primary focus in that chapter is on models in which the firm issues new equity and, hence, the owners are concerned about the beliefs of the investors who will buy the new equity. The impact of a potential entrant into the firm’s product market is examined in Sections 14.2.2 and 14.3.1. In the first instance, new equity is not issued but there is an exogenous cost of disclosing the manager’s information. In the second instance, new equity is issued and disclosure is costless. Both settings yield partial disclosure. If the potential entrant is the only recipient of the manager’s costly disclosure, then the manager discloses bad news and withholds good news. On the other hand, if new investors and the potential entrant are both recipients of the manager’s costless disclosure, then there can exist an equilibrium in which the manager withholds both very bad and very good news, while disclosing the news between the two extremes.
Peter O. Christensen, Gerald A. Feltham

Backmatter

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