Background Note | HBS Case Collection | May 1990 (Revised September 1994)

Note on Financial Reporting Strategy and Analysis When Managers Have Proprietary Information

by Krishna G. Palepu

Abstract

Provides a framework that helps explain these real-world observations about accounting and financial statement analysis. When managers have superior information on firms' strategies, and when investors suspect that managers have incentives not to fully disclose this information, financial reporting becomes an important managerial issue. Managers' superior information is a source of both value and distortions in accounting data. Accounting conventions and standards evolve over time to restrict managers' ability to distort financial data, but they leave considerable room for managers to reflect their superior knowledge of their businesses. The net result of these forces is that accrual accounting data are biased and noisy, and investors can assess firms' performance only imprecisely. Managers can improve investors' evaluation of their firms' performance through sound disclosure strategies. Financial analysts attempt to create inside information from public data and therefore play a valuable role in the communication between managers and investors.

Keywords: Financial Reporting; Strategy; Knowledge Management;

Citation:

Palepu, Krishna G. "Note on Financial Reporting Strategy and Analysis When Managers Have Proprietary Information." Harvard Business School Background Note 190-188, May 1990. (Revised September 1994.)