Accounting Disclosure and Real Effects by Chandra Kanodia

By Chandra Kanodia

Accounting Disclosure and actual results offers a brand new method of the learn of accounting size and disclosure that demanding situations the present accounting literature. This new technique - the "real results" point of view - argues that how enterprises' monetary transactions, gains, and capital flows are measured and mentioned to the capital markets has significant results at the organisations' genuine judgements and at the allocation of assets within the financial system in most cases. Accounting Disclosure and actual results will be required examining for accounting regulators and company managers who've to accommodate substitute accounting criteria and disclosure requisites. This landmark survey is the one resource to target the genuine results method of the research of disclosure.

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Example text

Given that the accounting measurement s is noisy, it is clear that the capital market is unable to make perfect inferences of either k or θ. The capital market will need to assess posterior distributions of k and θ conditional on s. In order to do this, the market needs to conjecture an investment policy k(θ) that describes beliefs about how the firm would choose an investment level contingent on each value of θ that the manager could observe. Given such a conjectured investment policy, an assessed posterior distribution on θ would statistically imply a posterior distribution on k, so no further assessments are needed.

If it is assumed that the firm’s investments remain unchanged at some prespecified levels, say K ∗ , N ∗ then the ex ante value of the firm would be 2µ(K ∗ )α (N ∗ )β − K ∗ − N ∗ in all three disclosure regimes. Thus it would be moot whether intangibles are measured or expensed, even though the statistical associations between accounting data and stock prices would change with the disclosure regime. Different ways 53 of studying the issue may identify different sources of real effects, but consideration of such real effects is essential to the debate.

3. Given assumptions (A1) through (A4), when the profitability of investment θ is known to the firm’s manager but unknown to the capital market, and the firm’s investment is measured imprecisely, the equilibrium investment schedule has the linear form k(θ) = bθ. The value of the parameter b depends on the amount of noise (σ 2 ) in accounting measurements. Any b in the interval 1c ≤ b ≤ 1+2γ c is sustainable by some corresponding value of σ 2 . Notice that b = 1c corresponds to managerial myopia and b = 1+2γ c corresponds to perfect signalling.

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