Optimal Disclosure Rule and Efficient Liquidation

Jiang, Xiaobei; Yang, Ming

doi:10.2139/ssrn.2857446

Cited by 3 publications

(4 citation statements)

References 43 publications

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“…7 This result is related to that in Jiang and Yang [2021], who document that first-best investment efficiency can be achieved when managerial private benefit is sufficiently small through appropriately adjusting contract.…”

Section: Introductionmentioning

confidence: 75%

The Value of Mandatory Certification: A Real Effects Perspective

Jiang

Xin

Xiong

2022

J of Accounting Research

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We study the real effects of certification to demonstrate the value of mandatory certification over and above mandatory disclosure in enhancing investment efficiency. In our model, a firm's manager selects a project to maximize the firm's short‐term stock price, which is a function of her certification and disclosure decisions about the outcome of the project. Although the manager might be either forthcoming or strategic with regard to the disclosure of her private information, she can strategically choose whether to incur a cost or not to certify her disclosure, unless mandated. The manager always selects the first‐best project when both certification and disclosure are mandatory. However, when certification is voluntary, project selection is inefficient. In addition, mandating disclosure without mandating certification can lead to lower investment efficiency than mandating neither. In justifying why mandatory certification is beneficial for public firms, our results offer a note of caution regarding the contemplated regulatory moves for increased disclosures by public firms without corresponding certification requirements, for example, the recent SEC proposal requiring extensive climate‐related disclosure.

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Section: Introductionmentioning

confidence: 75%

The Value of Mandatory Certification: A Real Effects Perspective

Jiang

Xin

Xiong

2022

J of Accounting Research

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“…Numerous studies have been conducted on optimal information systems when firms are financially constrained. Many of these studies have considered financial constraints as background context to examine the role of information, while the focus has often been on designing an optimal information system (Jiang and Yang 2021; Goex and Wagenhofer 2009, 2010; Bertomeu and Cheynel 2015). These studies have focused on optimal accounting biases in disclosures (e.g., conservative vs. liberal accounting, and fair value vs. historical cost) and have typically assumed unrestricted information‐structure choices.…”

Section: Related Literaturementioning

confidence: 99%

“…Many studies in this line of literature have shown that an asymmetric, biased information system can be optimal. For example, in a setting with managerial private benefits from the continuation of a project, Jiang and Yang (2021) find that the optimal accounting system features less‐conservative rules (i.e., a lower threshold to release good signals). Our analysis also shows that a liberal information system is optimal when leverage is intermediate but there are no private managerial benefits.…”

Section: Extensionsmentioning

confidence: 99%

Financial Leverage, Information Quality, and Efficiency*

Lin

Wen

2023

Contemporary Accting Res

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We examine information quality and financial leverage when an entrepreneur needs financing to undertake a risky project and his effort input affects the project's outcome. We show that information quality and financial leverage interact to play active roles in both investment and effort decisions. Our analysis shows a positive association between leverage and optimal information quality—when leverage is low (high), low (high) information quality is optimal. This is because with low leverage, the entrepreneur is already motivated by his large share of the outcome to exert effort, and high information quality is not efficient as a precise bad signal discourages the entrepreneur's effort. In contrast, when leverage is high and thus the entrepreneur is less motivated by his residual cash flows, high information quality is optimal, because a precise good signal encourages the entrepreneur's effort. Our study highlights the joint effect of information quality and financial leverage on overall efficiency through firms' effort inputs as well as on defining investment efficiency.

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“…As a direct consequence of market clearing in (9), the reporting system

θ_{b}

depends only on the capital

L

needed to operate and the aggregate capital

double-struckE ((), \overset{true˜}{A})

, but does not depend on agency problems or the quality of projects, in contrast to conventional theory in this area; see, for example, Watts (2003), Bertomeu et al (2017), or Jiang and Yang (2022). Before we present further interpretations of this restriction, it is worth noting that our objective is not to dispute the theoretical argument prevailing under partial equilibrium.…”

Section: Conservatism and The Cost Of Capitalmentioning

confidence: 99%

Toward a general equilibrium theory of financial reporting

Bertomeu

Cheynel

2023

Contemporary Accting Res

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We present a model in which investment capacity is reallocated in response to aggregate shocks and examine the resulting general equilibrium effects. The theory predicts a positive association between aggregate liquidity shocks, cost of capital, and conservative accounting. When capital becomes scarce, the accounting system is designed to preserve collateral, which depletes the supply of traded capital and leads to a higher cost of capital. The economy may accelerate small shocks with large (discontinuous) readjustments in financial reporting policies, cost of capital, and investment activity. We show that accounting policies set by firms to increase their market value may imply multiple equilibria, with self‐fulfilling inefficient equilibria exhibiting excessive collateral requirements and reduced aggregate investment.

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Optimal Disclosure Rule and Efficient Liquidation

Cited by 3 publications

References 43 publications

The Value of Mandatory Certification: A Real Effects Perspective

The Value of Mandatory Certification: A Real Effects Perspective

Financial Leverage, Information Quality, and Efficiency*

Toward a general equilibrium theory of financial reporting

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