With regard to the contracting explanation, accounting conservatism reduces moral hazard problems caused by contracting parties with asymmetric information, asymmetric payoffs
, limited horizons, and limited liability.
The major novelty of our article is to study by means of a laboratory experiment the impact of cheap talk communication and the emergence of turn taking in a symmetric two-player two-stage coordination game with asymmetric payoffs. A typical illustration of this type of game is the vertical differentiation model formalized by Gabszewicz and Thisse (1979) and Shaked and Sutton (1982) where firms can avoid price wars in the second stage of their interactions by offering goods of different quality levels in the first stage.
In testing the relationship between turn taking and communication, we hypothesize that preplay communication may facilitate the use of a turn-taking strategy in our two-stage game with asymmetric payoffs. To test this hypothesis, we introduced cheap talk communication (Farrel and Rabin 1996) in two treatments.
Besides disclosing the percentage of hedge coverage in identified exposure areas, reporting entities should also offer greater detail about the types of derivatives they use--those with symmetric payoff functions (e.g., futures, forwards, swaps), where gains or losses accrue in magnitudes consistent with price changes in either direction, or those with asymmetric payoffs
(e.g., options, caps, floors, combinations of each), where payoffs are constrained in some fashion.
The combined effect of both of "uncertainty" and "managerial flexibility" may generate an asymmetric payoff condition called "contingent claim" where the project's revenue drastically shift and the fact one of the most popular capital budgeting theories, the NPV (Net Present Value) analysis, is limited to assess the value change caused by these asymmetric payoffs makes people seek alternations to resolve this issue.
The managerial flexibilities provide specific kinds of asymmetric payoffs analogous to those of the derivatives in a financial market.
This transformation is flexible for describing option-like and other asymmetric payoffs based on a symmetrically distributed underlying variable.
To see this, suppose that f ([[epsilon].sup.I.sub.P]) describes the negatively asymmetric payoffs of a typical insurance contract--occasional large negative outcomes offset by far more frequent small positive outcomes.
Under this contracting explanation, conservative accounting is a means of addressing moral hazard caused by parties to the firm having asymmetric information, asymmetric payoffs, limited horizons, and limited liability.
Litigation also produces asymmetric payoffs in that overstating the firm's net assets is more likely to generate litigation costs for the firm than understating net assets.
PROPOSITION 6 (COMPARATIVE STATICS FOR ASYMMETRIC PAYOFFS).
These asymmetric payoff effects can be accentuated by shifts in parameters that do not alter the Nash predictions.