By Chandra Kanodia, Carlson School of Management, University of Minnesota, USA, email@example.com
In this paper I advocate and illustrate a new approach to the study of accounting measurement and disclosure that is strikingly different from the usual studies of disclosure in pure exchange economies. This new approach studies the "real effects" of accounting disclosure, arguing that how accountants measure and report firms' economic transactions, earnings and cash flows to capital markets has strong effects on firms' real decisions and on resource allocation in the economy. I explicitly study the real effects of accounting for firms' intangible investments and accounting for firms' derivatives/hedge activities. I also shed new light on more fundamental accounting issues such as the real effects of imprecision in accounting measurement and the real effects of periodic performance reporting. Studies of real effects have the potential to inform accounting policy debates since they are built around very specific economic transactions and their accounting treatment.
Accounting Disclosure and Real Effects presents a new approach to the study of accounting measurement and disclosure that challenges the existing accounting literature. This new approach - the "real effects" perspective - argues that how firms' economic transactions, earnings, and capital flows are measured and reported to the capital markets has substantial effects on the firms' real decisions and on the allocation of resources in the economy in general.
Accounting Disclosure and Real Effects answers the following questions: How does accounting for derivative transactions change a firm's risk management, speculation and production policies? How does the measurement of intangibles change a firm's mix of tangible and intangible investments? Does the way in which we account for executive compensation change the compensation package and the incentives of managers? Does fair value accounting for bank portfolios change its lending and portfolio strategies? Does accounting conservatism increase the efficiency of debt contracting?
Accounting Disclosure and Real Effects should be required reading for accounting regulators and corporate managers who have to deal with alternative accounting standards and disclosure requirements. This landmark survey is the only source to focus on the real effects approach to the study of disclosure.