Biases in Accounting and Nonaccounting Information: Substitutes or Complements?

Abstract

This paper studies how bias in nonaccounting and in accounting information should be related. Bias in accounting information is modeled, as in some recent literature, as an alteration in the relative information content of accounting numbers. The optimal bias in one type of information is shown to be a complement of the bias in the other type. This result can be applied in various settings to explain a number of phenomena.

The Complementarity Between Signal Informativeness and Monitoring

“…As opposed to a signal of firm performance, which is “hard” or verifiable information, the information gathered by boards via monitoring is typically “soft” or nonverifiable (Cornelli, Kominek, and Ljungqvist [2013]). It is already well known that hard and soft information can be complementary (Gigler and Hemmer [1998], [2001], Dye and Sridhar [2004], Şabac and Tian [2015], Jiang [2016], Chen and Schneemeier [2022]). These papers study the complementarity of hard information and soft information when the latter is a report by the manager and the manager can misreport.…”