Estado de la cuestión (3): proyectos de investigación relacionados con

Since the model is solved by backward induction, we first have to deter- mine the optimal compensation contract for each financial accounting regime and afterwards identify the optimal financial accounting regime choice. An optimal compensation contract solves the following problem:

max ˆ ω0,ωˆ1 E0  UE_{(V, S) AR} subject toE0UM(W) AR ≥0

and arg max

e,α U

M_{(W, e, α)}

Lemma 2 The entrepreneur designs the compensation contract which maxi- mizes his expected wealth by obeying the managers’ participation and incentive constraints: ˆ ω1(HC) = β 2_ξ δ1 +γξ(σ2 µ+σλ2)  (14) ˆ ω1(F V) = β 2_ξ δ1 +γξ(σ2 µ+ση2+σ2λ)  (15)

Proof. See appendix.

The entrepreneur can choose between the historical cost and the fair value financial accounting regime. If he chooses historical cost he can induce higher eÿort and thus increase the terminal firm value. But, historical cost leads to more opaque stock prices and thus to a lower interim stock price on average. On the other hand, fair value accounting makes stock prices more transparent, because all (private) information will be priced. But proving more information will also lead to a more volatile stock price and thus the manager will demand a

higher risk premium for her compensation uncertainty. Since the entrepreneur is concerned with optimal motivation of the manager as well as transparent stock prices, the accounting regime choice depends on the model parameters.

Lemma 3 The fair value (historical cost) accounting regime is beneficial, if the following equation is positive (negative).

E0UE(V, S) F V−E0UE(V, S) HC = 1 2 ση2 2cDr¯ − β 4_γξ2 Bσ2 µ+σ2λ   Bσ2 µ+σ2η +σλ2  ! where B ≡δ+β2_ξ+γδξ

Proof. See appendix.

Lemma 3 shows that the financial accounting regime choice is ambiguous. We finally use a comparative static analysis to show how the relative advantage of a financial accounting regime will depend on the model parameters.

Proposition 1 The entrepreneur is more willing to choose the fair value ac- counting regime if

(i) his preference for consumption smoothing (c) increases or (ii) the risk aversion of market participants (r) increases or

(iii) the manager’s disutility of eÿort (δ) increases or

(iv) the production risk of the firm (σ2

µ) increases or

(v) the productivity of the manager (β) decreases or

(vi) the disutility of manipulation ξ decreases or

(vii) the accounting noise σ2

λ increases.

The eÿect is unclear if

Proof. See appendix.

The intuition for (i) and (ii) is straightforward. As the preference for consumption smoothing increases, the entrepreneur prefers more disclosure or rather ecient stock prices. Therefore, the entrepreneur’s utility under histor- ical cost accounting will, ceteris paribus, decrease in comparison to fair value accounting. As the risk aversion of market participants increases, they demand a higher risk premium for the risky asset. Due to the fact that uncertainty about the terminal firm value under historical cost is higher than under the fair value regime, the stock price will decrease relatively more in the historical cost accounting regime and the entrepreneur is more willing to choose the fair value accounting regime.

As we would expect, (iii) and (iv) imply that increasing disutility of eÿort and increasing production risk make the fair value accounting regime more favorable. Asδ increases, inducing eÿort will be more costly, the entrepreneur lowers ˆω1 and thus the equilibrium amount of eÿort decreases. Therefore,

using an accounting regime to assess managerial actions to induce high eÿort will be less eÿective and historical cost accounting becomes less beneficial in comparison to fair value accounting. The same is true for production risk. If

σ2

µ increases the variance of the stock price will also increase. Therefore, the manager demands a higher risk premium and the entrepreneur lowers ˆω1. On

the other hand, as the productivity factor β increases (v), more eÿort leads to a higher terminal firm value and (interim) stock prices. The manager will exert more eÿort. In this situation, the entrepreneur is more willing to choose the historical cost regime to more eciently induce high managerial eÿort.

With increasing cost of manipulation ξ (vi), the equilibrium amount of manipulation decreases. The entrepreneur responds by increasing ˆω1, which

ing information looses the ability to asses managerial eÿort and motivating the manager to exert high eÿort will be more expensive and fair value accounting becomes relatively more desirable.

For (viii) and (ix) the intuition is more complex: On the one hand, as managerial risk-aversion γ increases (viii), inducing high eÿort will be more costly and the entrepreneur lowers ˆω1 and choosing fair value becomes benefi-

cial to the entrepreneur. On the other hand, an increasing level of managerial risk-aversion will lead to a higher risk premium in the compensation contract. Because uncertainty in the compensation contract is higher in the fair value accounting regime, the historical cost accounting regime becomes relatively more favorable. The aggregate eÿect on financial accounting regime choice is ambiguous. The same cross eÿect will hold for market risk (ix). As σ2

η increases, the disutility of stock price opaqueness under the historical cost accounting regime will increase. However, the fair value accounting regime negatively aÿects the risk-sharing between manager and entrepreneur. Again, the aggregate eÿect is ambiguous. In the next section we use observational data to test the main implications of Proposition 1 for empirical validity.

3 Empirical Analysis