Optimal Comparability, Real Effects, and Asset Prices

Wu, Su‐Mei; Xue, Wenjie

doi:10.2139/ssrn.3409454

Cited by 2 publications

(1 citation statement)

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“…(2019) and Wu and Xue (2019) also examine the optimal degree of harmonization (which they term comparability), yet in di¤erent settings with neither investment externalities nor private signals, and they do not study the issue of whether it is desirable to mandate accounting harmonization. In contrast, we consider a setting that features investment externality in the form of an investment beauty contest, which plays a key role in our study of accounting harmonization.…”

Section: Related Literaturementioning

confidence: 99%

Accounting Harmonization and Investment Beauty Contests

2020

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We study the optimal degree of harmonization of accounting standards when rms' in-vestments exhibit "beauty-contest" features as in, e.g., Arya and Mittendorf (2016). We model more harmonization of accounting standards as the noises in rms' reports being more correlated, consistent with Barth et al. (1999). We show that while more harmonized accounting standards have ambiguous e¤ects on the reports' informativeness in represent-ing rms'underlying fundamentals, they always reduce the reports'precision in forecasting rms'aggregate investment. The stronger the "beauty-contest"features, the more important the forecasts about the aggregate investment, and thus the less harmonized the standards should be.We also nd that, while absent beauty-contest features, mandatory adoption of more harmonized accounting standards can be unnecessary, such mandate is warranted when beauty-contest features are strong.Taken together, our results both provide a justi cation for and identify an unintended consequence of the recent mandates towards more harmonized accounting standards.

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Section: Related Literaturementioning

confidence: 99%