Commonality of Accounting Standards and Investment Beauty Contests

55 Pages Posted: 8 Jan 2021 Last revised: 11 Jun 2021

See all articles by Xu Jiang

Xu Jiang

Duke University

Chao Tang

Hong Kong University of Science & Technology (HKUST) - Department of Accounting

Gaoqing Zhang

University of Minnesota - Twin Cities - Department of Accounting

Date Written: June 8, 2020

Abstract

We study the optimal level of commonality of accounting standards when firms' investments exhibit beauty-contest features as in, e.g., Arya and Mittendorf (2016). We model more commonality of accounting standards as more correlated noises in firms' reports, consistent with the "more harmonized" accounting standards notion in Barth et al. (1999). We show that while more common accounting standards have ambiguous effects on the reports' informativeness in representing firms' underlying fundamentals, they always reduce the reports' precision in forecasting firms' aggregate investment. The stronger the beauty-contest features, the more important the forecasts about the aggregate investment, and thus the less common the standards should be. We also find that, absent beauty-contest features, mandatory adoption of more common accounting standards can be unnecessary; however, such mandate is warranted when beauty-contest features are strong as firms, when left on their own, would adopt even less common standards. Taken together, our results both provide a justification for and identify an unintended consequence of the recent mandates towards adoption of more common accounting standards.

Keywords: Beauty Contest, Investment Externality, Information Spillover, Disclosure, Accounting Standards, Harmonization, IFRS Adoption

JEL Classification: M41, M48

Suggested Citation

Jiang, Xu and Tang, Chao and Zhang, Gaoqing, Commonality of Accounting Standards and Investment Beauty Contests (June 8, 2020). HKUST Business School Research Paper No. 2020-011, Available at SSRN: https://ssrn.com/abstract=3724400 or http://dx.doi.org/10.2139/ssrn.3724400

Xu Jiang (Contact Author)

Duke University ( email )

100 Fuqua Drive
Durham, NC 27708-0204
United States

Chao Tang

Hong Kong University of Science & Technology (HKUST) - Department of Accounting ( email )

Clear Water Bay
Kowloon
Hong Kong

Gaoqing Zhang

University of Minnesota - Twin Cities - Department of Accounting ( email )

321 19th Avenue South
Minneapolis, MN 55455
United States

HOME PAGE: http://https://carlsonschool.umn.edu/faculty/gaoqing-zhang

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