Accrual Accounting and Resource Allocation: A General Equilibrium Analysis

Choi, Jung Kyu

doi:10.2139/ssrn.2977082

“…We envision three immediate applications of our findings. First, we suggest extending the dynamic investment model by adding information frictions (e.g., timing error of cash flows or information asymmetry between managers and outsiders) and explicit accounting systems (e.g., accrual accounting and/or conservative accounting rules; in the vein of Liang, Sun, and Tam [], Beyer, Guttman, and Marinovic [], Choi [], and Nikolaev []). Such extensions can produce novel predictions for the incremental effect of information frictions and accounting rules/systems on the dynamic properties of investment, earnings, and returns.…”

Section: Resultsmentioning

confidence: 99%

“…Our study suggests that the workhorse dynamic investment model presents a useful starting point for accounting researchers in search of a model for the dynamics of economic earnings. Future research, by adding particular measurement systems, such as conservative accounting rules or accruals (Choi [], Nikolaev []), or other frictions, such as financing frictions (Bolton, Chen, and Wang []), agency problems (DeMarzo et al. [], Nikolov and Whited []), earnings management (Beyer, Guttman, and Marinovic [], Bertomeu et al.…”

Section: Introductionmentioning

confidence: 99%

Investment Dynamics and Earnings‐Return Properties: A Structural Approach

Breuer

¹

,

Windisch

²

2019

J of Accounting Research

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We propose the standard neoclassical model of investment under uncertainty with short-run adjustment frictions as a benchmark for earnings-return patterns absent accounting influences. We show that our proposed benchmark generates a wide range of earnings-return patterns documented in accounting research. Notably, our model generates a concave earnings-return relation, similar to that of Basu [1997], and predicts that the earnings-return concavity increases with the volatility of firms' underlying shock processes and decreases with the level of firms' investments. We find strong empirical support for these predictions. Overall, our evidence suggests that our proposed benchmark is useful for understanding the joint dynamics of variables of interest to accounting research (e.g., earnings, returns, investment,

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“…His approach uses accounting relations between accruals and cash flows as well as the fact that accruals reverse to identify the quality of the accounting information (or system) in a GMM estimation framework. The key construct is a quantitative estimate for information quality at the firm or industry level (see also Choi 2018 for embedding this measure in a macroeconomic comparison of accounting systems). Another example is Smith (2018).…”

Section: The Measurement Challenge and Structural Modelingmentioning

confidence: 99%

Evidence-Based Policymaking: Promise, Challenges and Opportunities for Accounting and Financial Markets Research

Leuz

¹

2018

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The use of evidence and economic analysis in policymaking is on the rise, and accounting standard setting and financial regulation are no exception. This article discusses the promise of evidence-based policymaking in accounting and financial markets as well as the challenges and opportunities for research supporting this endeavor. In principle, using sound theory and robust empirical evidence should lead to better policies and regulations. But despite its obvious appeal and substantial promise, evidence-based policymaking is easier demanded than done. It faces many challenges related to the difficulty of providing relevant causal evidence, lack of data, the reliability of published research, and the transmission of research findings. Overcoming these challenges requires substantial infrastructure investments for generating and disseminating relevant research. To illustrate this point, I draw parallels to the rise of evidence-based medicine. The article provides several concrete suggestions for the research process and the aggregation of research findings that could be considered if scientific evidence is to inform policymaking. I discuss how policymakers can foster and support policy-relevant research, chiefly by providing and generating data.

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“…Accounting research has studied such effects in capital markets (e.g., Bushee andLeuz 2005, Badertscher et al 2013), although the number of studies is low and the evidence still needs to be corroborated and extended. We also need more work on the effects of disclosure regulation on competition, firm productivity, and the allocation of resources (e.g., labor and capital), which has just begun (e.g., Breuer 2017, Choi 2018).…”

Section: A Brief Digression: Opportunities For Future Accounting Resementioning

confidence: 99%

“…quantitative estimate for information quality at the firm or industry level (see also Choi 2018 for embedding this measure in a macroeconomic comparison of accounting systems). Another example is Smith (2018).…”

Section: The Measurement Challenge and Structural Modelingmentioning

confidence: 99%

Evidence-Based Policymaking: Promise, Challenges and Opportunities for Accounting and Financial Markets Research

Leuz

¹

2018

View full text Add to dashboard Cite

The use of evidence and economic analysis in policymaking is on the rise, and accounting standard setting and financial regulation are no exception. This article discusses the promise of evidence-based policymaking in accounting and financial markets as well as the challenges and opportunities for research supporting this endeavor. In principle, using sound theory and robust empirical evidence should lead to better policies and regulations. But despite its obvious appeal and substantial promise, evidence-based policymaking is easier demanded than done. It faces many challenges related to the difficulty of providing relevant causal evidence, lack of data, the reliability of published research, and the transmission of research findings. Overcoming these challenges requires substantial infrastructure investments for generating and disseminating relevant research. To illustrate this point, I draw parallels to the rise of evidence-based medicine. The article provides several concrete suggestions for the research process and the aggregation of research findings if scientific evidence is to inform policymaking. I discuss how policymakers can foster and support policy-relevant research, chiefly by providing and generating data. The article also points to potential pitfalls when research becomes increasingly policy-oriented.JEL classification: A11, D61, D72, G18, G38, K22, L51, M48 * This paper is based on my 2017 PD Leake Lecture at the ICAEW. I acknowledge helpful comments from the editors, Luzi Hail, Christian Laux and, especially, Maximilian Muhn. I also thank Maximilian Muhn for his excellent research assistance. I have worked as an economic advisor to the PCAOB and still serve as a consultant from time to time. I have also co-written independent research reports on policy questions for the FASB and the SASB. The views expressed in this paper are my own.

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Accrual Accounting and Resource Allocation: A General Equilibrium Analysis

Cited by 14 publications

References 33 publications

Investment Dynamics and Earnings‐Return Properties: A Structural Approach

Investment Dynamics and Earnings‐Return Properties: A Structural Approach

Evidence-Based Policymaking: Promise, Challenges and Opportunities for Accounting and Financial Markets Research

Evidence-Based Policymaking: Promise, Challenges and Opportunities for Accounting and Financial Markets Research

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