The economic consequences of discrete recognition and continuous measurement

Pingyang Gao and Xu Jiang

Journal of Accounting and Economics, 2020, vol. 69, issue 1

Abstract: Discrete recognition is a long-standing and ubiquitous accounting practice, but it has been widely criticized for suppressing information and inducing accounting-motivated transactions. We study a model to examine the economic consequences of shifting away from discrete recognition to a continuous measurement approach. Without manipulation, discrete recognition is less informative than the continuous approach. However, the continuous regime induces more manipulation. The equilibrium informativeness is determined by both the accounting standard and endogenous manipulation. Discrete recognition is more informative than its continuous counterpart precisely when manipulation is a severe threat. We respond to the recent call in Kothari, Ramanna, and Skinner (2010) for using positive accounting theory to explain certain long-standing accounting practices. We also discuss the model's implications for fair value accounting.

Keywords: Accounting standards; Evidence management; Recognition; Measurement; Disclosure; Fair value (search for similar items in EconPapers)
JEL-codes: G28 G38 M41 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jaecon:v:69:y:2020:i:1:s016541011930045x

DOI: 10.1016/j.jacceco.2019.101250

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