On the social value of accounting objectivity in financial stability

Pierre Jinghong Liang, Gaoqing Zhang

Research output: Contribution to journalArticlepeer-review

1 Scopus citations

Abstract

In this paper, we analyze the social value of accounting objectivity in maintaining financial stability. Building on an early influential accounting study by Ijiri and Jaedicke (1966), we operationalize two informational properties, accuracy (free of collective bias) and objectivity (degree of consensus), in a correlated information structure and embed them into a model of runs on financial institutions. We show that when compared with the accuracy property, the objectivity property exhibits an advantage in mitigating inefficient panic-based runs. In fact, it is possible that improving objectivity discourages such runs, whereas improving accuracy encourages them. Our model also sheds light on the design of optimal accounting systems to enhance objectivity. We find that to generate a more objective accounting report, accounting systems should be designed to be less vulnerable to intentional managerial intervention.

Original languageEnglish (US)
Pages (from-to)229-248
Number of pages20
JournalAccounting Review
Volume94
Issue number1
DOIs
StatePublished - Jan 2019

Bibliographical note

Funding Information:
We thank Rick Antle, Andrew Bird, Sabine Bockem (discussant), Carlos Corona, Phil Dybvig, Huberto Ennis, Pingyang Gao, Frank Gigler, Marvin Goodfriend, Borys Grochulski, Thomas Hemmer (editor), Xu Jiang, Chandra Kanodia, Michael Kirschenheiter (discussant), Jing Li, Mark Loewenstein, Brian Mittendorf, Ned Prescott, Korok Ray, Tom Ruchti, Ulf Schiller, Dirk Simons, Jack Stecher, Shyam Sunder, Jake Thomas, two anonymous referees, and workshop participants at the 2015 American Accounting Association Annual Meeting, the 2015 Accounting Research Workshop in Zurich, Carnegie Mellon University, the Federal Reserve Bank of Richmond, the Institute of Financial Studies at SWUFE, Texas A&M University, University of Minnesota, and the 2017 SOM Summer Research Conference at Yale University. Pierre Liang gratefully acknowledges the Dean’s Summer Research funding of the Tepper School.

Keywords

  • Accounting objectivity
  • Correlated signals
  • Differential interpretation
  • Financial stability
  • Higher-order beliefs

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