Optimal Thresholds in Accounting Recognition Standards

36 Pages Posted: 12 Dec 2015

See all articles by Pingyang Gao

Pingyang Gao

Booth School of Business, University of Chicago

Date Written: December 11, 2015

Abstract

This paper investigates the design of recognition thresholds in accounting standards. In statistics, a threshold classi.es evidence to balance two types of recognition errors weighted by their respective costs to a decision maker. In accounting recognition standards, a threshold induces firms to respond strategically and thus affects the very distribution of evidence the threshold classi.es. With this strategic effect, the optimal recognition threshold is determined by not only the decision maker’s loss function but also the transaction’s features. We compare the optimal threshold’s properties under the statistical and strategic approaches, provide their respective empirical predictions, and discuss the limitations of using a statistical approach to guide accounting standard setting.

Keywords: Thresholds, Evidence Management, Accounting Standard Setting, Statistical Inference

JEL Classification: M41, M45, G28, G38

Suggested Citation

Gao, Pingyang, Optimal Thresholds in Accounting Recognition Standards (December 11, 2015). Chicago Booth Research Paper No. 15-50, Available at SSRN: https://ssrn.com/abstract=2702496 or http://dx.doi.org/10.2139/ssrn.2702496

Pingyang Gao (Contact Author)

Booth School of Business, University of Chicago ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

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