Abstract
We study the economic impacts of adopting harmonized accounting standards when firms’ investments exhibit beauty contest features. We model harmonized accounting standards as common/correlated noises in firms’ accounting reports. We show that while more harmonized accounting standards have ambiguous effects on the reports’ informativeness in representing firms’ underlying fundamentals, they always reduce their usefulness in forecasting aggregate investments. Therefore, the stronger the beauty contest features, the more important the forecasts about the aggregate investment, thus calling for less harmonized accounting standards. We also find that, absent beauty contest features, mandatory adoption of harmonized accounting standards can be unnecessary; however, such a mandate is warranted when beauty contest features are strong as firms, when left on their own, would not voluntarily do so. Taken together, our results provide both a justification for and identification of an unintended consequence of the recent mandates toward adopting harmonized accounting standards.
Original language | English (US) |
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Pages (from-to) | 377-404 |
Number of pages | 28 |
Journal | Accounting Review |
Volume | 98 |
Issue number | 7 |
DOIs | |
State | Published - Nov 2023 |
Externally published | Yes |
Bibliographical note
Publisher Copyright:© 2023 American Accounting Association. All rights reserved.
Keywords
- accounting standards
- beauty contest
- correlated reporting noises
- disclosure
- harmonization
- IFRS adoption
- information spillover
- investment externality