Title: Information asymmetry, transparency and the conceptual framework

Authors: Benzion Barlev, Joshua Rene Haddad

Addresses: The Centre for Academic Studies, 2, Hayotzrim Street, Or Yehuda, Israel; School of Business Administration, The Hebrew University of Jerusalem, Jerusalem 91905, Israel. ' 7, Zichron-Yaacov Street, Tel-Aviv 62999, Israel

Abstract: In 2008, the FASB and the IASB, in collaboration, issued an exposure draft of a conceptual framework for financial reporting. The boards agree that decision-useful information should be the main feature of financial reporting. The boards ignore, however, the fact that information asymmetry, which enables |insider trading| and |earnings management|, may hamper this objective. US regulators try to thwart |insider trading| with |full disclosure| (FD) reporting requirement. FD contracts but does not prevent the phenomena of |earnings management| – a key factor in recent market debacles. We argue that transparency in financial reporting may further diminish |earnings management|. This |see-through| qualitative feature exposes mangers| motivation for business activities, and clarifies their agreement with the firm|s objectives. We propose that |full disclosure| and |transparency| are complementary features, which may lessen information asymmetry and enhance usefulness. We suggest integration of these qualities into the CF.

Keywords: conceptual framework; transparency; full disclosure; information asymmetry; fair value accounting; financial reporting; insider trading; earnings management.

DOI: 10.1504/IJEA.2010.033899

International Journal of Economics and Accounting, 2010 Vol.1 No.1/2, pp.22 - 45

Published online: 03 Jul 2010 *

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