Review of Accounting Studies

, Volume 23, Issue 2, pp 622–653 | Cite as

An information-based model for the differential treatment of gains and losses

  • Venky Nagar
  • Madhav V. Rajan
  • Korok Ray


This study defines reporting conservatism as a higher verification standard for probable gains compared to losses and builds a model that endogenously generates optimal behavior resembling an asymmetric preference for gains versus losses. Our model considers the setting where one party produces a resource and another tries to expropriate it. The key factor determining the extent of the gain-loss asymmetry is the level of information asymmetry or trust between the two parties. The information asymmetry-based results of our model provide a simpler explanation for the vast empirical literature on conservatism, where the bulk of the economic relationships among the parties appear to be information-based with little direct relation to explicit debt contracts, a factor that has been the focus of theoretical arguments. We also suggest new empirical analyzes.


Conservatism Information asymmetry Evolution Risk preferences 

JEL Classification

D91 G11 G41. 



We are especially grateful to two anonymous reviewers and Stephen Penman (editor). We also thank Sudipta Basu, S.P. Kothari, John List, Robert Trivers (Rutgers), and seminar participants at Arizona State, George Mason, Maryland, Miami, Michigan State, Minnesota, UBC, UC Irvine, UCLA, USC, UT Dallas, and UVA for their comments.


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Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2018

Authors and Affiliations

  1. 1.University of MichiganAnn ArborUSA
  2. 2.University of ChicagoChicagoUSA
  3. 3.Texas A&M UniversityCollege StationUSA

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