Aggressive Accounting as a Commitment to be Prudent

36 Pages Posted: 17 Aug 2019

See all articles by Volker Laux

Volker Laux

University of Texas at Austin - McCombs School of Business

Ronghuo Zheng

University of Texas at Austin - McCombs School of Business

Date Written: August 12, 2019

Abstract

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

Laux, Volker and Zheng, Ronghuo, Aggressive Accounting as a Commitment to be Prudent (August 12, 2019). Available at SSRN: https://ssrn.com/abstract=3437073 or http://dx.doi.org/10.2139/ssrn.3437073

Volker Laux

University of Texas at Austin - McCombs School of Business ( email )

2317 Speedway
Austin, TX 78712
United States

Ronghuo Zheng (Contact Author)

University of Texas at Austin - McCombs School of Business ( email )

Austin, TX 78712
United States

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