Soft information and the stewardship value of accounting disclosure

Abstract

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.

Discourses surrounding the evolution of the IASB/FASB Conceptual Framework: What they reveal about the “living law” of accounting

“…well as the tensions and trade-offs between the two objectives (Indjejikian, 1999;Heinle & Hofmann, 2011). For example, in the analytical agency tradition, Heinle and Hofmann (2011) conclude that stewardship and decision-usefulness are ''potentially conflicting objectives of financial accounting'' and suggest that ''abandoning stewardship as a separate objective of financial accounting and mandating further disclosure of soft information by standard setters and regulators can result in lower productivity and reduced firm value'' (p. 354).…”

“…For example, in the analytical agency tradition, Heinle and Hofmann (2011) conclude that stewardship and decision-usefulness are ''potentially conflicting objectives of financial accounting'' and suggest that ''abandoning stewardship as a separate objective of financial accounting and mandating further disclosure of soft information by standard setters and regulators can result in lower productivity and reduced firm value'' (p. 354). However, there is a surprising dearth of equivalent capital market research on the nature of, and the relationship between, stewardship and decision-usefulness.…”