Optimal penalty and accounting policy

Masatomo Akita and Yusuke Osaki

Applied Economics, 2016, vol. 48, issue 54, 5292-5299

Abstract: This study considers risky investment projects under adverse selection and examines optimal penalties for erroneous auditing reports to maximize social welfare. These penalties give firms an incentive to choose accounting policies that maximize social welfare. We characterize the optimal penalties such that efficient firms choose an aggressive accounting policy and inefficient firms choose a conservative accounting policy.

Date: 2016
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DOI: 10.1080/00036846.2016.1176113

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