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

Author

Listed:
  • 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)

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.

Suggested Citation

  • Xu Jiang & Ming Yang, 2024. "Optimal Accounting Rules, Private Benefits of Control, and Efficient Liquidation," Management Science, INFORMS, vol. 70(9), pages 6302-6314, September.
    • Handle: RePEc:inm:ormnsc:v:70:y:2024:i:9:p:6302-6314
    DOI: 10.1287/mnsc.2019.03087
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