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Capital Allocation Effects of Financial Reporting Regulation and Enforcement

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  • Roland Königsgruber

Abstract

This paper analyses the effects of stricter financial reporting enforcement on capital allocation and reporting quality in a game-theoretic model and derives conclusions about optimal enforcement strictness. Analysis of the model shows that reporting quality strictly increases with tighter enforcement. However, the effect of stricter enforcement on capital allocation is non-monotonic. Intermediate enforcement strictness results in overdeterrence of viable projects even without costs of compliance. This effect can be alleviated by means of either less or more stringent enforcement.

Suggested Citation

  • Roland Königsgruber, 2012. "Capital Allocation Effects of Financial Reporting Regulation and Enforcement," European Accounting Review, Taylor & Francis Journals, vol. 21(2), pages 283-296, August.
  • Handle: RePEc:taf:euract:v:21:y:2012:i:2:p:283-296
    DOI: 10.1080/09638180.2011.558294
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