Optimal Accounting Rules, Private Benefits of Control, and Efficient Liquidation

Xu Jiang () and Ming Yang ()
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Xu Jiang: Fuqua School of Business, Duke University, Durham, North Carolina 27708
Ming Yang: Department of Economics, University College London, London WC1H 0AN, United Kingdom; School of Management, University College London, London WC1H 0AN, United Kingdom

Management Science, 2024, vol. 70, issue 9, 6302-6314

Abstract: We study optimal accounting rules that alleviate inefficiencies caused by managerial private benefits. Accounting signals generated by the accounting rules guide the continuation decision at an interim project stage. The entrepreneur enjoys private benefits from continuation, which may induce inefficient decisions. The optimal accounting rule is characterized by a threshold, with a higher threshold representing more conservative accounting. The first-best is achieved under small private benefits. As private benefits increase, the first-best eventually is not achievable and more informative bad news is required for the manager to terminate, resulting in less conservative accounting rules. Therefore, more conservative accounting rules are associated with more efficient investment decisions.

Keywords: optimal accounting rules; private benefits of control; accounting conservatism; information design; Bayesian persuasion (search for similar items in EconPapers)
Date: 2024
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