Imprecision in accounting measurement: Can it be value enhancing?

Chandra Kanodia, Rajdeep Singh, Andrew E. Spero

Research output: Contribution to journalArticlepeer-review

37 Scopus citations

Abstract

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.

Original languageEnglish (US)
Pages (from-to)487-519
Number of pages33
JournalJournal of Accounting Research
Volume43
Issue number3
DOIs
StatePublished - Jun 1 2005

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