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Accrual Accounting and Resource Allocation: A General Equilibrium Analysis
Author(s) -
CHOI JUNG HO
Publication year - 2021
Publication title -
journal of accounting research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 6.767
H-Index - 141
eISSN - 1475-679X
pISSN - 0021-8456
DOI - 10.1111/1475-679x.12365
Subject(s) - accrual , productivity , general equilibrium theory , economics , accounting , accounting information system , earnings , imperfect , resource allocation , production (economics) , cash flow , earnings management , throughput accounting , resource (disambiguation) , econometrics , microeconomics , business , industrial organization , financial accounting , macroeconomics , computer science , market economy , computer network , linguistics , philosophy
This paper evaluates the role of accrual accounting in improving firms' production decisions and resource allocation across firms. I introduce two imperfect firm‐performance measures, cash flows and accounting earnings, into a general equilibrium model with heterogeneous firms under imperfect information. The model demonstrates that improvements in measurement systems lead to more informed decisions on the part of firms and ultimately to allocation of greater resources to high‐productivity firms via the product and input markets. Estimated parameter values are consistent with accrual accounting improving managers' information about current productivity by providing a better measure of historical firm performance. Quantitative analysis suggests that introducing accrual‐accounting information on top of cash‐accounting information leads to a 0.5% increase in aggregate U.S. productivity and a 0.7% increase in aggregate U.S. output via improved resource allocation. The corresponding estimates for China and India, as benchmarks for developing countries, are larger: a 1.5% to 2.3% increase in aggregate productivity and a 2.3% to 3.4% increase in aggregate output. I conclude that accrual accounting plays a significant role in determining aggregate productivity via improved resource allocation.