The Value of Mandatory Certification: A Real Effects Perspective

Journal of Accounting Research, Forthcoming

Rotman School of Management Working Paper No. 4168096

65 Pages Posted: 27 Jul 2022

See all articles by Xu Jiang

Xu Jiang

Duke University

Baohua Xin

University of Toronto - Rotman School of Management

Yan Xiong

The Hong Kong University of Science and Technology

Date Written: July 20, 2022

Abstract

We study the real effects of certification to demonstrate the value of mandatory certification over and above mandatory disclosure in enhancing investment efficiency. In our model, a firm’s manager selects a project to maximize the firm’s short-term stock price, which is a function of her certification and disclosure decisions about the outcome of the project. While the manager might be either forthcoming or strategic with regard to the disclosure of her private information (Beyer and Dye, 2012; Bertomeu and Marinovic, 2016), she can strategically choose whether to incur a cost or not to certify her disclosure, unless mandated. The manager always selects the first-best project when both certification and disclosure are mandatory. However, when certification is voluntary, project selection is inefficient. In addition, mandating disclosure without mandating certification can lead to lower investment efficiency than mandating neither. In justifying why mandatory certification is beneficial for public firms, our results offer a note of caution regarding the contemplated regulatory moves for increased disclosures by public firms without corresponding certification requirements, for example, the recent SEC proposal requiring extensive climate-related disclosure..

Keywords: Certification, disclosure, real effects, disclosure regulation, audit regulation, ESG disclosure

JEL Classification: D82, G14, M42

Suggested Citation

Jiang, Xu and Xin, Baohua and Xiong, Yan, The Value of Mandatory Certification: A Real Effects Perspective (July 20, 2022). Journal of Accounting Research, Forthcoming , Rotman School of Management Working Paper No. 4168096, Available at SSRN: https://ssrn.com/abstract=4168096

Xu Jiang (Contact Author)

Duke University ( email )

100 Fuqua Drive
Durham, NC 27708-0204
United States

Baohua Xin

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

Yan Xiong

The Hong Kong University of Science and Technology ( email )

HKUST
Kowloon
Hong Kong
Hong Kong

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