A Theory of the Accounting Accelerator

41 Pages Posted: 6 Jan 2017

See all articles by Jeremy Bertomeu

Jeremy Bertomeu

University of California, San Diego (UCSD) - Rady School of Management

Edwige Cheynel

University of California, San Diego (UCSD) - Rady School of Management

Date Written: January 1, 2017

Abstract

This paper examines the aggregate consequences of accounting standard-setting in economies with financing frictions. We extend the framework of Bernanke and Gertler (1989) and Holmstrom and Tirole (1997) to optimal reporting of productive assets. Our main result is that the accounting process will offset acceleration for small or moderate financial frictions; in fact, the accounting process may make aggregate investment more rigid to decreases in fundamentals. However, for large enough financing frictions, the accounting process contributes to acceleration. The model explains when, given a small decline in fundamentals, the economy may respond with a discontinuous readjustment in accounting standards, prices and investment. The theory offers new hypotheses about the consequences of accounting choice in the aggregate.

Suggested Citation

Bertomeu, Jeremy and Cheynel, Edwige, A Theory of the Accounting Accelerator (January 1, 2017). Columbia Business School Research Paper No. 17-7. Available at SSRN: https://ssrn.com/abstract=2893544 or http://dx.doi.org/10.2139/ssrn.2893544

Jeremy Bertomeu (Contact Author)

University of California, San Diego (UCSD) - Rady School of Management ( email )

9500 Gilman Drive
Rady School of Management
La Jolla, CA 92093
United States

Edwige Cheynel

University of California, San Diego (UCSD) - Rady School of Management ( email )

Register to save articles to
your library

Register

Paper statistics

Downloads
172
rank
170,162
Abstract Views
1,011
PlumX Metrics