An Analysis of the Relation Between the Stewardship and Valuation Roles of Earnings

Bushman, Robert M.; Engel, Ellen; Smith, Abbie J.

doi:10.2139/ssrn.221548

Cited by 63 publications

(71 citation statements)

References 68 publications

(61 reference statements)

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“…8 Focusing on CEO cash compensation, Natarajan (1996) and Bushman et al (2001) find that inferences regarding the determinants of incentive weights placed on accounting measures are largely invariant to the inclusion of stock price information in the coefficient estimation.…”

Section: Implicit Contract Approachmentioning

confidence: 99%

“…This problem has been addressed by estimating coefficients using firm-specific timeseries regressions (e.g., Lambert and Larcker, 1987), pooled, industry time series, and cross-sectional estimation with industry slope interactions (e.g., Bushman et al, 1998Bushman et al, , 2001). However, pooling observations over time implicitly assumes that the pay-performance relation is stable over time.…”

Section: Implicit Contract Approachmentioning

confidence: 99%

“…While some papers explicitly incorporate the entire variance-covariance matrix of the performance measures into the empirical representation of sensitivity (e.g., Sloan, 1993;Natarajan, 1996), others do not (e.g., Clinch, 1991;Baber et al, 1996;Bushman et al, 2001).…”

Section: Operationalizing the Theorymentioning

confidence: 99%

“…The incentive weight on A relative to that on P can be described as the ratio of the ''sensitivity'' of each measure to managerial action, times the ratio of the precision of each measure. The general structure of the sensitivity measures are: Sensitivity A ¼ ðdE½Aje=deÞ À ðcovðA; PÞ=s 2 P Þ ðdE½Pje=deÞ; Sensitivity 17 Bushman et al (2001) conduct cross-sectional tests using shifts between time periods in model variables to control for omitted variables under the plausible assumption that managerial attitudes toward effort and risk are stable within an industry or firm over time. 18 Note that the contract exploits the correlation structure of the performance measures through the second term of each sensitivity measure.…”

mentioning

confidence: 99%

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Financial Accounting Information and Corporate Governance

2002

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This paper reviews and proposes additional research concerning the role of publicly reported financial accounting information in the governance processes of corporations. We first discuss research on the use of financial accounting in managerial incentive plans and explore future research directions. We then propose that governance research be extended to explore more comprehensively the use of financial accounting information in additional corporate control mechanisms, and suggest opportunities for expanding such research. We also propose cross-country research to investigate more directly the effects of financial accounting information on economic performance through its role in governance and more generally. r 2001 Elsevier Science B.V. All rights reserved.

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Section: Implicit Contract Approachmentioning

confidence: 99%

Section: Implicit Contract Approachmentioning

confidence: 99%

Section: Operationalizing the Theorymentioning

confidence: 99%

mentioning

confidence: 99%

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Financial Accounting Information and Corporate Governance

2002

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“…Whereas for financial decision making, non-recurring items are inconvenient and are often removed from profit figures (Barker, 2000;Imam, 2008), Christensen, Feltham andŞabac (2005) show that this is not always the case for stewardship. Importantly, however, both empirical market-based and theoretical studies report significant overlap between the stewardship and valuation roles (Banker, Huang, and Natarajan, 2009;Bushman, Engel and Smith, 2006;Drymiotes and Hemmer, 2013). In summary, the stewardship and valuation roles of financial statements overlap, but are far from identical, even for the same class of investor.…”

mentioning

confidence: 96%

Who Uses Financial Reports and for What Purpose? Evidence from Capital Providers

Cascino

Clatworthy

Osma

et al. 2014

Accounting in Europe

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We review the academic literature on the use of financial reporting information by capital providers. We classify our findings by investor type and by information objective. While most capital providers use accounting information, our survey indicates that they do so in a variety of ways with financial reporting information competing with other sources of information. We also find that information intermediaries are influential in both credit and equity markets, making the identification of a typical target 'user' inherently difficult. Our main findings question the underlying objective of the Conceptual Framework to guide the development of standards for general-purpose financial statements to provide a typical knowledgeable investor with a true and fair view about the reporting entity. Finally, we identify gaps in the literature and suggest areas where future research can help inform important academic and policy debates.

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Soft information and the stewardship value of accounting disclosure

Heinle

Hofmann

2010

OR Spectrum

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In light of IASB's statement to drop stewardship as a separate objective of financial accounting and the ongoing debate about increasing the disclosure of soft information, we investigate the economic consequences of publicly reported soft information from a stewardship perspective. In an LEN model we include market price as a performance measure and investigate whether the principal benefits from disclosing additional information. While the principal can only use contractible performance measures in the contract with the agent, capital market participants can only use disclosed information when pricing firm value. We find that the disclosure of information can decrease the principal's expected net profit. This result follows from either a noisier or a less congruent market price as a consequence of disclosing additional information. Thus, we present a rationale for partial disclosure in the absence of proprietary costs or the uncertainty of information endowment. Abstract:In the light of IASB's statement to drop stewardship as a separate objective of financial accounting and the ongoing debate about increasing the disclosure of soft information, we investigate the economic consequences of publicly reported soft information from a stewardship perspective. In a LEN model we include market price as a performance measure and investigate whether the principal benefits from disclosing additional information. While the principal can only use contractible performance measures in the contract with the agent, capital market participants can only use disclosed information when pricing firm value. We find that the disclosure of information can decrease the principal's expected net profit. This result follows from either a noisier or a less congruent market price as a consequence of disclosing additional information. Thus, we present a rationale for partial disclosure in the absence of proprietary costs or the uncertainty of information endowment.

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An Analysis of the Relation Between the Stewardship and Valuation Roles of Earnings

Cited by 63 publications

References 68 publications

Financial Accounting Information and Corporate Governance

Financial Accounting Information and Corporate Governance

Who Uses Financial Reports and for What Purpose? Evidence from Capital Providers

Soft information and the stewardship value of accounting disclosure

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