Review of Accounting Studies

, Volume 21, Issue 1, pp 251–279 | Cite as

Implications of biased reporting: conservative and liberal accounting policies in oligopolies

  • Henry L. Friedman
  • John S. Hughes
  • Richard Saouma


We examine the effects of biased (conservative or liberal) reporting on product market competition. Cournot duopolists observe either firm-specific or industry-wide shocks and provide noisy reports subject to an exogenous mandated bias attributed to public policy. Given neutral prior beliefs, either a conservative bias or a liberal bias enhances overall reporting-system informativeness as measured by the reduction of uncertainty. Consistent with previously established effects in the information sharing literature regarding increases in informativeness, we show that expected industry profits and expected consumer surplus may gain or lose from bias, depending on whether the shocks are firm-specific or industry-wide and the degree of product competition. Expected social welfare, however, always increases in bias, irrespective of the source of uncertainty and product substitutability or complementarity. We next consider a setting where firms self-select whether to bias reports and characterize regions of potential conflict with a public policy that maximizes expected social welfare. Further results on the differential effects of conservative or liberal bias follow from relaxing the assumption of neutral prior beliefs.


Conservatism Oligopoly Competition Information sharing Biased reporting 

JEL Classification

D43 L13 M41 



We thank Bugra Ozel, Jeremy Bertomeu, Judson Caskey, Elizabeth Gutierrez, Phillip Stocken, Richard Sansing, and other seminar participants at the Rady School of Management, the Tuck School of Business, the Smeal College of Business, the 2013 Junior Accounting Theory Conference, and the 2013 Swiss Accounting and Economics Workshop for their helpful comments. We especially appreciate the editor, Paul Fischer, for his guidance in extending our basic model.


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Copyright information

© Springer Science+Business Media New York 2015

Authors and Affiliations

  • Henry L. Friedman
    • 1
  • John S. Hughes
    • 1
  • Richard Saouma
    • 2
  1. 1.Anderson School of ManagementUniversity of California Los AngelesLos AngelesUSA
  2. 2.David Eccles School of BusinessUniversity of UtahSalt Lake CityUSA

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