The Economic Consequences of Expanding Accounting Recognition
35 Pages Posted: 19 Sep 2011 Last revised: 28 Sep 2017
Date Written: February 8, 2017
Abstract
This paper investigates the economic consequences of including more hard-to-measure future activities in a firm's accounting measurements. Using a simple model of endogenous investment in which payoffs are measured by either a restrictive or expanded recognition rule, we show that, in the process of expanding accounting recognition, firms' internal investment efficiency and external share-price risk premium may not necessarily be a trade-off. In particular, we show that the consequences of an accounting scope expansion depend on the investment environment (e.g., growth prospects) and the inherent measurement characteristics (e.g., measurement noise). For example, even with a higher measurement noise, an expanded accounting recognition may generate a lower risk premium in the share price. More surprisingly, it may lead to a higher investment efficiency and a lower risk premium at the same time. The underlying driving force is that different accounting regimes can affect the risk premium indirectly through their impacts on the investment level, beyond directly through the different measurement noise levels they bring.
Keywords: accounting measurement regimes; measurement scope; measurement noise; risk premium
JEL Classification: G12, G38, M41
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Reliability-Relevance Trade-Offs and the Efficiency of Aggregation
By Ronald A. Dye and Sri S. Sridhar
-
Stock Price, Earnings and Book Value in Managerial Performance Measures
-
Imprecision in Accounting Measurement: Can it Be Value Enhancing?
By Chandra Kanodia, Rajdeep Singh, ...
-
Earnings Quality Metrics and What They Measure
By Ralf Ewert and Alfred Wagenhofer
-
Accounting Measurement Basis, Market Mispricing, and Firm Investment Efficiency
By Pierre Jinghong Liang and Xiaoyan Wen
-
Voluntary Disclosure, Manipulation and Real Effects
By Anne Beyer and Ilan Guttman
-
Earnings Forecast, Earnings Management, and Asymmetric Price Response
By Baohua Xin
-
By Kathryn Kadous, Molly Mercer, ...