REVISION: A Measurement Approach to Binary Classifications and Thresholds
Date Posted: Nov 28, 2012
Classifications and thresholds are common in accounting rules. This paper explains one benefit of a binary classification and studies the properties of an optimal threshold in a model with managers’ opportunistic influence on raw evidence. A threshold that partitions raw evidence to a binary classification affects not only the ex post use of information by stakeholders but also the ex ante earnings management by managers. These dual functions differ qualitatively. As a result, the ex ante opti
REVISION: A Measurement Approach to Conservatism and Earnings Management
Date Posted: Oct 24, 2012
This paper develops a model of accounting measurement to study the design of the optimal measurement rule. The core of the model is a representation of accounting measurement process that features the manager’s opportunistic influence and the use of verification as a response. To safeguard against the manager’s ex post opportunism, the optimal measurement rule is conservative in the sense that it requires more verification of the transaction characteristics favorable to the manager. The mode
REVISION: Where Does the Information in Mark-to-Market Come From?
Date Posted: Sep 06, 2012
We study the ex-ante efficiency of mark-to-market accounting (MTM) in a loan market by taking into account its real effects on banks’ origination and retention decisions. Despite its benefit of improved valuation accuracy, MTM could reduce the overall efficiency of the economy. The efficiency loss results from the central idea of the paper: the attempt to exploit the information in market price, by adopting MTM, interferes with the market process that generates the information in price. Relati
REVISION: Informational Feedback Effect, Adverse Selection, and the Optimal Disclosure Policy
Date Posted: Feb 21, 2012
Trading in a secondary stock market not only redistributes wealth among investors but also generates information that guides subsequent investment. We provide a positive theory of disclosure that reflects both functions of a secondary market. By making private information public, disclosure reduces private information acquisition and levels the playing field. However, a leveled playing field has two opposite effects on firm value. On one hand, it ameliorates adverse selection among investors and
New: Economic Consequences of Idiosyncratic Information in Diversified Markets
Date Posted: Feb 21, 2012
While most accounting information is idiosyncratic in nature, economy-wide factors such as accounting standards affect the quality of idiosyncratic accounting information of many firms simultaneously. We study idiosyncratic and systematic features of accounting information by embedding a parsimonious, moral hazard problem into the framework of a multi-firm economy. Our model yields the insight that moral hazard distorts the sharing of idiosyncratic risk but does not affect the sharing of systema
REVISION: Disclosure Quality, Cost of Capital, and Investors' Welfare
Date Posted: Sep 10, 2009
One might expect that disclosure quality improves investor welfare by reducing cost of capital. This study shows that the argument is valid only in limited circumstances. Based on a production economy with perfect competition among investors, the analysis demonstrates three points. First, cost of capital could increase with disclosure quality when new investment is sufficiently elastic. Second, there are plausible conditions under which disclosure quality reduces the welfare of current and/or ne
New: Keynesian Beauty Contest, Accounting Disclosure, and Market Efficiency
Date Posted: Jan 07, 2008
This paper examines the market efficiency consequences of accounting disclosure in the context of stock markets as a Keynesian beauty contest, an influential metaphor originally proposed by Keynes (1936) and recently formalized by Allen, Morris, and Shin (2006). In such markets, public information plays an additional commonality role, biasing stock prices away from the consensus fundamental value toward public information. Despite this bias, I demonstrate that provisions of public information
REVISION: Keynesian Beauty Contest, Accounting Disclosure, and Market Efficiency
Date Posted: Sep 04, 2007
This paper examines the market efficiency consequences of accounting disclosure in the context of stock markets as a Keynesian beauty contest, an influential metaphor originally proposed by Keynes (1936) and recently formalized by Allen, Morris, and Shin (2006). In such markets, public information plays an additional coordination role, biasing stock prices away from the consensus fundamental value toward public information. Despite this bias, I demonstrate that provisions of public informatio