Accrual Accounting and Resource Allocation: A General Equilibrium Analysis
Stanford University Graduate School of Business Research Paper No. 3553
Journal of Accounting Research, Forthcoming
80 Pages Posted: 8 Jun 2017 Last revised: 22 Jan 2024
There are 2 versions of this paper
Accrual Accounting and Resource Allocation: A General Equilibrium Analysis
Accrual Accounting and Resource Allocation: A General Equilibrium Analysis
Date Written: January 7, 2021
Abstract
This paper evaluates the role of accrual accounting in improving firms’ production decisions and resource allocation across firms. I introduce two imperfect firm-performance measures, cash flows and accounting earnings, into a general equilibrium model with heterogeneous firms under imperfect information. The model demonstrates that improvements in measurement systems lead to more-informed decisions on the part of firms and ultimately to allocation of greater resources to high-productivity firms via the product and input markets. Estimated parameter values are consistent with accrual accounting improving managers’ information about current productivity by providing a better measure of historical firm performance. Quantitative analysis suggests that introducing accrual-accounting information on top of cash-accounting information leads to a 0.5% increase in aggregate U.S. productivity and a 0.7% increase in aggregate U.S. output via improved resource allocation. The corresponding estimates for China and India, as benchmarks for developing countries, are larger: a 1.5% to 2.3% increase in aggregate productivity and a 2.3% to 3.4% increase in aggregate output. I conclude that accrual accounting plays a significant role in determining aggregate productivity via improved resource allocation.
Keywords: accrual accounting, resource allocation, productivity, imperfect information
JEL Classification: M41, O11, O47, G30
Suggested Citation: Suggested Citation