Date of Degree
Masako N. Darrough
Edward X. Li
accounting measurement, real effects, structural estimation, accounting precision
Theory on real effects suggests that more precise accounting does not necessarily improve investment efficiency. However, with investment efficiency mostly unobservable, empirical assessment of the theory is rare. This paper develops an empirical framework based on Kanodia et al. (2005) to structurally estimate the effect of imprecision in accounting measurement on investment efficiency. My estimates suggest that imprecision in accounting measurement has mitigated over-investment in capital expenditures and R&D by 28.6% and 4.9%, respectively. On average, firms still over-invest relative to the first-best full-information benchmark. In counterfactual analyses, my estimates suggest that the optimal investment efficiency could be achieved by reducing the current accounting precision by 4 percentage points (19.5 percentage points) in capital expenditures (R&D), which would increase investor welfare by 4.2% (22%). My study is among the first to provide a quantitative assessment of real effects and presents early evidence of excessive precision in accounting measurement.
Liang, Ying, "How Much Does Imprecision in Accounting Measurement Enhance Value?" (2020). CUNY Academic Works.