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Constructing an information system. Constructing an information system. Constructing an information system. Constructing an information system. Constructing an information system. So…. Constructing an information System.
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Constructing an information System • The previous example illustrates how an information system could be portrayed using “real” data. In such a case, we don’t know what the “true” state was (eg. High or low)-we only know what was reported by the company (good news or bad news). This is because the state of nature for each company is not publicly observable. Thus, this is different than the information systems in the book which could capture the connection between the future REAL state and the current REPORTED state.
Note that the information system portrays the CONNECTION between future profitability and current news. It says GIVEN that future profitability is high, what is probability that current f/s show good or bad news. It does NOT tell you anything about the chances that a company will be in a good or bad state. So, if an event happens that changes the profitability of the company, it won’t have any effect on the information system probabilities. It increases the likelihood of having a good state, but doesn’t change the CONNECTION between future states of nature and current reporting. What WOULD change the information system would be a change in accounting standards, for example, that strengthen the predictive value, relevance or reliability so that the CONNECTION between future profitability and current news is higher.
Constructing an information System • If we could observe the state of nature, it is possible that companies could report something (GN or BN) different from the state of nature, but this would be odd as we would know they were lying. • Still, if there were no penalties for lying, maybe we would see something like this….
