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Accounting and the Financial Accelerator

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Title:Accounting and the Financial Accelerator
Authors:Edwige Cheynel
Bertomeu Bertomeu
Keywords:Asset Measurement
Financial Accelerator
Business Cycles
Date Issued:15 Aug 2020
Abstract:We extend the general equilibrium economy of Holmstrom and Tirole (1997) ¨
to optimal reporting of productive assets and examine when the accounting process
can contribute to fnancial acceleration. Given a small change in aggregate capital
stock, the economy may respond with large readjustments in accounting policies,
prices and investment activity. A neutral accounting system, defned as a policy that does not distort decision-making, is optimal when capital is abundant but, after a contraction in aggregate capital, the accounting system becomes initially liberal and then conservative. Surprisingly, accounting policies maximizing frm value, i.e., the net cash flows to shareholders, may lead to self-fulflling equilibria with ineffcient forced liquidations. The theory offers a stylized paradigm to evaluate accounting policies in the aggregate.
Appears in Collections: 17 Theory

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