Projects & Collaborations 2 foundShow per page10 10 20 50 Historic cost accounting versus fair value accounting Research Project | 2 Project MembersIn this project we consider firms that prepare accounting reports about the value of their assets. Two opposing rules are considered, (a) fair value accounting where the firm reports the (exected) price at which an asset could be sold to an outside investor and (b) historic cost accouting where the firm reports the asset's acquisition or construction cost. Following conventional wisdom, rule (b) is less prone to manipulation but also less informative than (a). In a first sub-project we show that this is not generally true. Rather, we show that under some circumstances incentives for manipulation under Rule (b) are greater than under rule (a). In a second sub-project we consider application of both rules in banks. Following the common claim that the recent financial crisis had been triggered by fair-value accounting, we investigate the likelihood of bank runs. We show that the claim is sometimes, but not always, true. In a third sub-project we follow the claim that giving companies the right to choose between rules (a) and (b) improves capital market efficiency, because discretion between both rules makes a signalling equilibrium possible. We explore the limits of that argument. FV-18 Underconfidence: Why Companies Hire Insecure Overachievers Research Project | 2 Project MembersOver- and underconfidence is the perceived misinterpretation of the own abilities. We investigate the effects of this misinterpretation on optimal incentive contracts in a moral hazard setting. We show that the agent chooses his effort level based on both, the difficulty of the assigned task and his self-assessment. We are especially interested in the agent who underestimates his abilities as we find that he chooses an effort level higher than necessary and that this unfolds an advantageous situation for the principal. Due to this duality of underconfidence but overprovision of effort, we call this type the 'Insecure Overachiever' while the type who overestimates his abilities and thus chooses an effort level lower than necessary we call the 'Hot Nozzle'. From our model we want to further show that for any specific task difficulty the assignment of one of three types of agents, the 'Insecure Overachiever', the 'Hot Nozzle' or one who well estimates his abilities, is efficient. 1 1
Historic cost accounting versus fair value accounting Research Project | 2 Project MembersIn this project we consider firms that prepare accounting reports about the value of their assets. Two opposing rules are considered, (a) fair value accounting where the firm reports the (exected) price at which an asset could be sold to an outside investor and (b) historic cost accouting where the firm reports the asset's acquisition or construction cost. Following conventional wisdom, rule (b) is less prone to manipulation but also less informative than (a). In a first sub-project we show that this is not generally true. Rather, we show that under some circumstances incentives for manipulation under Rule (b) are greater than under rule (a). In a second sub-project we consider application of both rules in banks. Following the common claim that the recent financial crisis had been triggered by fair-value accounting, we investigate the likelihood of bank runs. We show that the claim is sometimes, but not always, true. In a third sub-project we follow the claim that giving companies the right to choose between rules (a) and (b) improves capital market efficiency, because discretion between both rules makes a signalling equilibrium possible. We explore the limits of that argument.
FV-18 Underconfidence: Why Companies Hire Insecure Overachievers Research Project | 2 Project MembersOver- and underconfidence is the perceived misinterpretation of the own abilities. We investigate the effects of this misinterpretation on optimal incentive contracts in a moral hazard setting. We show that the agent chooses his effort level based on both, the difficulty of the assigned task and his self-assessment. We are especially interested in the agent who underestimates his abilities as we find that he chooses an effort level higher than necessary and that this unfolds an advantageous situation for the principal. Due to this duality of underconfidence but overprovision of effort, we call this type the 'Insecure Overachiever' while the type who overestimates his abilities and thus chooses an effort level lower than necessary we call the 'Hot Nozzle'. From our model we want to further show that for any specific task difficulty the assignment of one of three types of agents, the 'Insecure Overachiever', the 'Hot Nozzle' or one who well estimates his abilities, is efficient.
