Accrual Accounting and Resource Allocation: A General Equilibrium Analysis

80 Pages Posted: 8 Jun 2017 Last revised: 22 Jan 2024

See all articles by Jung Ho Choi

Jung Ho Choi

Stanford Graduate School of Business

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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

Choi, Jung Ho, Accrual Accounting and Resource Allocation: A General Equilibrium Analysis (January 7, 2021). Stanford University Graduate School of Business Research Paper No. 3553, Journal of Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2977082 or http://dx.doi.org/10.2139/ssrn.2977082

Jung Ho Choi (Contact Author)

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305
United States
650-721-8434 (Phone)

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