Abstract
Accounting performance measures are the end products of a series of unobservable managerial product decisions, unobservable noise, and accounting choices. This paper develops conditions under which accounting performance measures generated by sequential production and reporting decisions can be useful for contracting purposes. It explains how production technology and reporting discretion distinctly influence the stewardship value of accounting performance measures. In particular, it shows that the reports are useful whenever managers have limited discretion and when the bounds of the reporting set are informative about managerial action. The implications of the model for standard setting and empirical research on contract efficiency are then discussed.
Get full access to this article
View all access options for this article.