Information Externalities and Accounting Standardization

41 Pages Posted: 17 Mar 2025

See all articles by Zeqiong Huang

Zeqiong Huang

Yale School of Management

Korok Ray

Texas A&M University

Yun Zhang

George Washington University

Date Written: December 12, 2024

Abstract

Firms' information disclosure is a public good: When firm fundamentals are correlated, one firm's information can benefit others in making better decisions. Without regulation, firms fail to internalize the benefits of their disclosure and underproduce information. To address this, firms may resort to integration (become devisions of a combined firm and let the headquarters set the level of information production) or accounting standardization (remain independent and let the regulator set a uniform information production level). We find that integration's flexibility enhances investment efficiency ex post, but also leads divisions to overinvest ex ante. Accounting standardization can curb free-riding incentives and improve investment efficiency. Overall, our results suggest accounting standardization addresses information externalities and affects the optimal boundaries of the firm.

Suggested Citation

Huang, Zeqiong and Ray, Korok and Zhang, Yun, Information Externalities and Accounting Standardization (December 12, 2024). Available at SSRN: https://ssrn.com/abstract=5104146 or http://dx.doi.org/10.2139/ssrn.5104146

Zeqiong Huang

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

Korok Ray (Contact Author)

Texas A&M University ( email )

4113 TAMU College State
TX 77843-4113
United States

HOME PAGE: http://mays.tamu.edu/directory/korok/

Yun Zhang

George Washington University ( email )

2121 I Street NW
Washington, DC 20052
United States

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