Metering Problems and Resource Allocation

Abstract

Why do seemingly similar firms show such different productivity? We argue that unresolved measurement problems, i.e., the persistent incongruity between economic transactions and their accounting representation, affect resource allocation. Our metric quantifies technical accounting terminology in firm disclosures to capture these unresolved measurement problems, U M P , using over 90,000 10-Ks. A one-standard-deviation increase in U M P is associated with lower capital investment (6%), R&D (5%), and hiring growth (30%). We also find a reduction in total factor productivity (5%) and Tobin's Q (4%). Further, CEO compensation sensitivity to accounting performance decreases with U M P , while stock-based sensitivity remains unaffected. Our inferences continue to hold when we use a Bartik instrument, which exploits differential exposure to GAAP changes to isolate accounting-driven variation from the firm's underlying economics. The results suggest unresolved measurement problems are a significant friction in resource allocation. We make our U M P dataset publicly available.

Keywords: measurement, information frictions, productivity, investment, CEO compensation contracts JEL codes: D22

JEL Classification: D22, D23, D24, G12, J23, M40