Accounting Measurement Intensity

77 Pages Posted: 30 Jun 2020

See all articles by Ionela Andreicovici

Ionela Andreicovici

Frankfurt School of Finance & Management

Laurence van Lent

Frankfurt School of Finance & Management

Valeri V. Nikolaev

University of Chicago Booth School of Business

Ruishen Zhang

Shanghai University of Finance and Economics

Date Written: June 2020

Abstract

We propose an empirical measure of metering problems, i.e., the difficulties of measuring productivity and rewards in firms. We build on the insight that these metering problems are reflected in the intensity with which firms apply Generally Accepted Accounting Principles when preparing their financial statements to capture economic transactions. We adapt a simple computational linguistics algorithm to identify textual patterns that uniquely signify heightened use of accounting measurement in preparation of accounting reports. We validate the output of this algorithm before computing time-varying, firm-level scores of accounting measurement intensity (AMI). We then show that AMI is associated with the decisions of professional users of accounting information. We also document that AMI is correlated with the cross-section of expected equity returns and with the cost of debt and non-price terms in the private loan market. In CEO compensation contracts, we see lower pay-performance sensitivity to accounting performance metrics as AMI increases. Finally, we report that AMI correlates with investment and hiring decisions in firms; factor productivity, as well as the efficiency of resource allocation. Together, these findings are consistent with the predictions in Alchian and Demsetz (1972) about how metering problems affect the boundary of the firm.

Keywords: metering problem, accounting measurement, stewardship, theory of the firm

JEL Classification: D22, D23, D24, G12, J23, M40

Suggested Citation

Andreicovici, Ionela and van Lent, Laurence and Nikolaev, Valeri V. and Zhang, Ruishen, Accounting Measurement Intensity (June 2020). Chicago Booth Research Paper No. 20-17, Available at SSRN: https://ssrn.com/abstract=3639267 or http://dx.doi.org/10.2139/ssrn.3639267

Ionela Andreicovici

Frankfurt School of Finance & Management ( email )

Adickesallee, 32-34
32-34
Frankfurt am Main, 60322
Germany

Laurence Van Lent

Frankfurt School of Finance & Management ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

Valeri V. Nikolaev (Contact Author)

University of Chicago Booth School of Business ( email )

5807 South Woodlawn Avenue
Chicago, IL 60637
United States

HOME PAGE: http://faculty.chicagobooth.edu/valeri.nikolaev/index.html

Ruishen Zhang

Shanghai University of Finance and Economics ( email )

No. 777 Guoding Road, Shanghai
Shanghai, 200433
China

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