Aggressive Accounting as a Commitment to be Prudent
36 Pages Posted: 17 Aug 2019
Date Written: August 12, 2019
Accounting information provides guidance for real decisions such as whether to liquidate or continue an ongoing project. Ceteris paribus, implementing an accounting system with an aggressive bias leads to inefficient project continuations and causes a higher cost of capital. We show that an aggressive accounting system can nevertheless be beneficial for the manager because the very fact that it induces excessive project continuations permits the manager to commit to abstain from taking excessive risks prior to the continuation decision. In short, we find that creating inefficiencies with respect to interim project continuations can discipline the manager's project choice ex ante, and hence facilitate financing.
Keywords: Aggressive Accounting, Commitment, Risk Shifting
JEL Classification: D80, G30, M41
Suggested Citation: Suggested Citation