Final answer:
Relevant accounting information is characterized by its ability to help form future expectations, lack of bias, and provision of feedback for prior expectations. This is especially important considering imperfect information in financial markets, where those inside a firm often know more than outside investors.
Step-by-step explanation:
The characteristics of relevant accounting information include several key aspects that ensure the data is useful for decision-making processes. First, it is crucial that the information helps users form expectations about the future, offering insights into prospective financial scenarios. Second, ensuring that the information provided is not biased and free from manipulation is essential for maintaining its integrity and reliability. Lastly, relevant accounting information should provide feedback to confirm or correct prior predictions, enabling users to adjust their expectations and strategies accordingly.
In the context of how firms choose between sources of financial capital, these characteristics of relevancy tie into dealing with imperfect information, which is a situation where there is an information asymmetry between buyers and sellers. The management of a firm typically possesses more detailed knowledge related to the firm's future profitability compared to outside investors. Providing reliable information, devoid of bias, which can assist in forming accurate future expectations and offer constructive feedback, plays a vital role in economic decision-making and the optimal allocation of scarce resources.