A Real Effects Perspective to Accounting Measurement and Disclosure: Implications and Insights for Future Research

Abstract

Accounting measurement and disclosure rules have a significant impact on the real decisions that firms make. In this essay, we provide an analytical framework to illustrate how such real effects arise. Using this framework, we examine three specific measurement issues that remain controversial: (1) How does the measurement of investments affect a firm's investment efficiency? (2) How does the measurement and disclosure of a firm's derivative transactions affect a firm's choice of intrinsic risk exposures, risk management strategy, and the incentive to speculate? (3) How could marking-tomarket the asset portfolios of financial institutions generate procyclical real effects? We draw upon these real effects studies to generate sharper and novel insights that we believe are useful not only for the development of accounting standards, but also for guiding future empirical research. JEL codes: D82; D84; G14; G18; G30; M41; M42

Disclosure and Choice

“…As has been noted in the literature, 25 there are good reasons for expecting managerial compensation to depend positively on both short-run and long-run stock prices. First, if the long run is indeed long, the manager requires compensation in the short run too.…”

“…24 We thank David Kreps for pointing this out. 25 See, for example, the discussion in Stein (1989) or Edmans, Heinle, and Huang (2013).…”

Disclosure and the Cost of Capital: A Survey of the Theoretical Literature

“…To see this, consider a signal structure of the form discussed earlier with yjs ¼ N m 1 y ; V 1 y where: 33 This problem adds to a deeper issue that is central to the literature on real effects, namely, that we cannot trace properties of price, such as a risk premium, to welfare without assumptions about the real decisions (which would affect welfare) that are made based on these prices. This idea is illustrated in Gao and Liang (2013) which examines the informational connections between price and real decisions, and it is discussed at greater length in the review by Kanodia and Sapra (2016). 34 See Gao (2010), Beyer (2012), Zhang (2013), and Cheynel (2013) for comprehensive treatments of the relationship between the risk premium, welfare, and investment choices.…”

Measuring the Degree of International Harmonisation inSelected Accounting Practice: the Case of Tunisian Firms

“…From 1973 when the International Accounting Standards Committee (IASC) was constituted, the interest of international accounting harmonisation has increased and accountants began to study the reasons behind the differences among accounting practices. In fact, the need for a single set of financial reporting standards-which is deemed the approach to achieving international harmonisation of accounting -has become inevitable (Kanodia & Sapra 2016;Qu & Zhang 2010).In some areas (such as European countries), the aim of reaching harmonisation is likely to be achieved since all corporations with shares listed on securities exchanges were forced (in 1/1/2005) to prepare their annual reports in accordance with international standards (IFRS) (de jure harmonisation is likely to be achieved in this area) as an attempt to reduce differences in financial reports prepared by enterprises (Baker & Barbu 2007; Wehrfritz & Haller 2014).…”