財務會計理論(司可脫)文件09_scott_im_ch09

1、Conflict ResolutionGame TheoryAgency Theory1Agency TheoryA principal wants to hire an agent for some specialized taskSeparation of ownership and controlPrincipal and agent are rational. Agent is risk-averse. Principal may be risk-averse, but assume risk-neutral for simplicityPrincipal wants agent to

2、 work hard, butAgent is effort-averse2Moral Hazard Problem of Information Asymmetry Principal cannot observe manager effort - call it aCall managers disutility of effort V(a)More effort- greater disutilityImplies manager may shirk on effortE.g., if paid a fixed salary, how hard will the manager work

3、?3Agency Contract Example 9.3Owner: rational, risk-neutralWants to max. expected firm payoff xManager: rational, risk-averse and effort-averseWants to max. expected utility of compensation c, net of disutility of effort V(a)To overcome shirking, why not give manager a share of payoff?4Agency Contrac

4、t Example 9.3A problem arises:Firm payoff not known until after contract expires (single period contract). Why?Manager has to be paid at contract expiryA solution:Base manager compensation on a performance measure (e.g., net income), which is available at period end5Timeline for Agency Example6Motiv

5、ation of Manager EffortTo motivate manager effort, give manager a share of firm net incomeConcept of reservation utility, call it RIf manager is to work for owner, must receive expected utility of at least R7Assumptions for Agency Contract Example 9.3Manager has 2 effort choices:Work hard (a1 )Shirk

6、 (a2 )If manager works hard, payoff isx = 100 with prob. 0.6x = 50 with prob. 0.4If manager shirks, payoff isx = 100 with prob. 0.4x = 50 with prob. 0.68Assumptions, contd.Managers contract (linear): c = ky, 0 k 1, where y is net incomeManagers reservation utility: R = 3Quality of net income y (nois

7、y, but unbiased, e.g., fair value accounting)If x is going to be 100y = $125 with prob. 0.5y = $75 with prob. 0.5If x is going to be 50y = $62.50 with prob. 0.5y = $37.50 with prob. 0.5 9Assumptions, contd.Managers utilityEUm(a1) = 0.60.5(k 125)1/2 + 0.5(k 75)1/2+ 0.40.5(k 62.50)1/2 + 0.5(k 37.50)1/

8、2 - 2EUm(a2) = 0.40.5(k 125)1/2 + 0.5(k 75)1/2 + 0.60.5(k 62.50)1/2 + 0.5(k 37.50)1/2 1.7Owners utility (risk neutral)EUO(a1) = 0.60.5(1 k) 125) + 0.5(1 k) 75)+ 0.40.5(1 k) 62.50) + 0.5(1 k) 37.50) 10Formal Statement of the Owners Problem Find k to maximize EUO(a)Subject to:Manager wants to take a1

9、(incentive compatibility)manager receives reservation utility of R = 3The result:K = .32611CheckManagers utilityEUm(a1) = 0.60.5(.326 125)1/2 + 0.5(.326 75)1/2+ 0.40.5(.326 62.50)1/2 + 0.5(.326 37.50)1/2 2 = 3EUm(a2) = 0.40.5(.326 125)1/2 + 0.5(.326 75)1/2+ 0.60.5(.326 62.50)1/2 + 0.5(.326 37.50)1/2

10、 1.7 = 2.96Manager will work hard, (i. e., incentive compatible)12Check, contdOwners utilityEUO(a1) = 0.6100 0.5(.326 125) + 0.5(.326 75)+ 0.450 0.5(.326 62.50) + 0.5(.326 37.50) = 53.9213A More Efficient Contract, Example 9.4Retain previous assumptions, exceptQuality of net income y (less noisy, st

11、ill unbiased)If x is going to be 100y = $110 with prob. 0.5y = $90 with prob. 0.5If x is going to be 50y = $55 with prob. 0.5y = $45 with prob. 0.514A More Efficient Contract, contd.Thenk = .322 (compared with .326 in previous contract)EUm(a1) = 0.60.5(.322 110)1/2 + 0.5(.322 90)1/2 + 0.40.5(.322 55

12、)1/2 + 0.5(.322 45)1/2 2 = 3EUm(a2) 3 can be verifiedEUO(a1) = 0.6100 0.5(.322 125) + 0.5(.322 75)+ 0.450 0.5(.322 62.50) + 0.5(.322 37.50) = 54.24 Owners utility greater than previous contract15Implications of Agency Theory For Financial AccountingNet income mattersThe agency relationship is a cont

13、ract. Contracts are rigidImplies accounting policy choice and changes to accounting policy matterManager will usually object to new accounting standards that:Lower reported net income (why?)Increase its volatility (why?)16Implications, Contd.Net income must be jointly observable (i.e., by manager an

14、d owner)Role for GAAP, audit17Implications, Contd.Holmstrms agency modelBasing managers compensation on 2 variables is better than on 1 variable, unless the 2 variables are perfectly correlatedThis implies that net income is in competition with share price performance for “market share in compensati

15、on contracts18Implications, Concl.To maintain market share, net income should be highly informative about manager effortProperties net income needs to be highly informativeSensitivityNet income responds to changes in manager effortPrecisionNet income has low noise re effort19Implications, Concl.Unfo

16、rtunately, sensitivity and precision must be traded offHistorical cost accountingLow sensitivity due to recognition lagHigh precision since relatively unaffected by market-wide factorsFair value accountingHigh sensitivity due less recognition lagLow precision since affected by market-wide factorsFun

17、damental problem of financial accounting theoryMost useful net income for investors is not necessarily the most informative about manager effort20Multi-Period ConsiderationsManager reputation and resulting value of manager on managerial labour market motivates effortNet income provides information to market about