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

Chandra Kanodia · Haresh Sapra

317 citations0/0 files storedJournal of Accounting Research

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Accounting Theory and Financial Reporting Auditing, Earnings Management, Governance Risk Management in Financial Firms

Abstract

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‐to‐market 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.

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1976Theory of the firm: Managerial behavior, agency costs and ownership structure 1984Corporate financing and investment decisions when firms have information that investors do not have 1979Moral Hazard and Observability 1984Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have 1968An Empirical Evaluation of Accounting Income Numbers 2005The economic implications of corporate financial reporting 1985Positive Accounting Theory 2010Understanding earnings quality: A review of the proxies, their determinants and their consequences

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