Purpose: To explore the role of accounting discretion in a principal-agent setting, where accounting information is used in performance evaluation. The agent, who is to be evaluated, may choose one from among several allowable accounting methods. However, limited audit resources allow only for...

Accounting is often viewed from a legalistic rather than economic perspective. Finance, on the other hand, is deeply rooted in economic theory, but at its heart is built on assumptions of frictionless markets. Neither perspective fully incorporates the rich economic environment in which we find...