On the Optimal Relation between the Properties of Managerial and Financial Reporting Systems

We develop a theoretical model of the …rm that links properties (stewardship vs. valuation focus) of …nancial reporting regimes with the informational properties of optimal managerial accounting systems. We show that, contrary to the standard textbook proposition, properties of management and …nancial accounting systems are not independent. Signi…cantly, we provide an explicit connection between exogenous and observable properties of a …rm’s …nancial reporting system and the quality of the managerial accounting system on which manager(s) base real economic decisions. As the quality of those economic decisions can also be inferred from publicly available data, our theory generates new opportunities for empirical managerial accounting research on large non-proprietary samples. Further, by being able to identify enhanced performance due to improved managerial accounting information, our theory provides opportunities to gain a better understanding of the link between particular managerial accounting practices and the quality of the information produced. Comments are certainly welcomed and can be directed to either author. We gratefully acknowledge comments and/or suggestions by Michael Bromwich, Jon Glover, Evelyn Korn, Christian Leuz, Mark Penno, Mary Stanford, Jerry Zimmerman and participants at the Yale SOM Accounting Research Conference, Accounting Research Day Antwerp, Lone Star Conference SMU, Freiburg Accounting Research Conference, 2007 American Accounting Association Annual Meeting and workshops at Instituto de Empresa Madrid, Rotman School of Management Toronto, University of Houston and WHU Otto Beisheim School of Management Vallendar.