Accounting Measurement Intensity
81 Pages Posted: 30 Jun 2020 Last revised: 12 Dec 2020
Date Written: December 2020
We propose an empirical measure of firms' metering problems. We build on the notion that metering problems are reflected in the intensity with which firms apply Generally Accepted Accounting Principles (GAAP) to map economic transactions onto financial statements. We develop an algorithm to identify textual patterns that uniquely signify the use of accounting measurements, and construct firm-level scores of accounting measurement intensity, AMI. Metering problems are an important source of transaction costs that affect form boundaries and productivity; we show that firms with higher AMI exhibit lower levels of investment and hiring. Furthermore, we provide evidence that metering problems are associated with lower total factor productivity and with lower firm growth, as measured by Tobin's Q. We then examine metering frictions that reduce firms' access to capital. Specifically, we show that AMI is positively associated with the cost of debt as well as with measures of information asymmetry among equity investors, including the probability of informed trade and the coverage of a firm by financial analysts. Finally, we present evidence that metering problems influence firms' contracts, and show that these problems link to non-price terms in debt contracts and to the pay-performance sensitivity of CEO compensation contracts. Together, these findings are consistent with the predictions in Alchian and Demsetz (1972) that metering problems affect firms' boundaries and contracts with outsiders.
Keywords: metering problem, accounting measurement, stewardship, theory of the firm, productivity, contracts
JEL Classification: D22, D23, D24, G12, J23, M40
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