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Properties of optimal accounting rules in a signaling game

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  • Jiang, Xu
  • Yang, Ming

Abstract

We characterize the properties of optimal accounting rules in a signaling game. An impatient firm sells shares to competitive investors. The firm can signal its private information about the fundamental by retaining a fraction of the shares. In addition, the firm can commit to disclosing information according to a set of accounting rules chosen ex ante. Information disclosure reduces signaling cost so that perfect disclosure is optimal. When perfect disclosure is impossible, the optimal accounting rule features a lower bound and a summary statistic of the fundamental. The interpretation of the lower bound is consistent with accounting conservatism, and the statistic summarizes the information most relevant to the firm׳s valuation. The justification for accounting conservatism relies on the existence of information asymmetry and the infeasibility of perfect accounting disclosure. This is consistent with the conjecture of LaFond and Watts (2008) that information asymmetry calls for accounting conservatism.

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  • Jiang, Xu & Yang, Ming, 2017. "Properties of optimal accounting rules in a signaling game," Journal of Accounting and Economics, Elsevier, vol. 63(2), pages 499-512.
    • Handle: RePEc:eee:jaecon:v:63:y:2017:i:2:p:499-512
    DOI: 10.1016/j.jacceco.2016.07.004
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    1. Xu Jiang & Ying Xue, 2023. "Morale, performance and disclosure," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 56(1), pages 5-23, February.
    2. Bertomeu, Jeremy, 2024. "Disclosure paternalism," Journal of Accounting and Economics, Elsevier, vol. 77(2).
    3. Dordzhieva, Aysa & Laux, Volker & Zheng, Ronghuo, 2022. "Signaling private information via accounting system design," Journal of Accounting and Economics, Elsevier, vol. 74(1).
    4. Jinzhi Lu, 2022. "Limited Attention: Implications for Financial Reporting," Journal of Accounting Research, Wiley Blackwell, vol. 60(5), pages 1991-2027, December.
    5. Felix Zhiyu Feng & Wenyu Wang & Yufeng Wu & Gaoqing Zhang, 2023. "Ignorance Is Bliss: The Screening Effect of (Noisy) Information," Papers 2302.11128, arXiv.org, revised Aug 2024.
    6. Blankespoor, Elizabeth & deHaan, Ed & Marinovic, Iván, 2020. "Disclosure processing costs, investors’ information choice, and equity market outcomes: A review," Journal of Accounting and Economics, Elsevier, vol. 70(2).
    7. Lu, Tong & Ruan, Lijun, 2024. "Coordination and Conservatism," Finance Research Letters, Elsevier, vol. 61(C).
    8. Jeremy Bertomeu & Edwige Cheynel & Davide Cianciaruso, 2021. "Strategic Withholding and Imprecision in Asset Measurement," Journal of Accounting Research, Wiley Blackwell, vol. 59(5), pages 1523-1571, December.

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