Accounting Uniformity, Comparability, and Resource Allocation Efficiency

Abstract

Uniformity is an essential feature of financial reporting, yet its desirability has long been debated. We study a model in which firms decide whether to adopt either their locally preferred accounting methods or a common method, followed by an investor allocating capital across firms. Firms’ choices of a common method are strategic complements in attaining more comparable reports. As a result, multiple equilibria may exist. Specifically, an equilibrium in which firms use their local methods always exists. However, an equilibrium in which firms adopt a common method exists if uniformity improves comparability significantly and firm-specific productivity shocks are large relative to the common productivity shock. Firms may fail to coordinate on adopting the Pareto dominant accounting method, which may not even emerge as an equilibrium if investments exhibit substitutability. These coordination problems provide accounting regulation an opportunity to facilitate efficient capital allocation, thus providing a micro-foundation for accounting measurement regulation.

Keywords: Accounting standards, uniformity, comparability, disclosure regulation, resource allocation.

JEL Classification: D02, D61, D83, H11, M48, M40, M41