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A Theory of Principles-Based Classification
|Title:||A Theory of Principles-Based Classification|
|Date Issued:||18 Aug 2020|
|Abstract:||We study a firm's decision to classify transactions as recurring or nonrecurring in a setting with no fixed classification scheme, but with the following principle: recurring transactions must be more persistent than nonrecurring ones. Under this principle, equilibrium firm behavior provides a new explanation for the observed relationship between income and classifications. Moreover, we find that market prices are more informative under principles-based classifications than they would be under a hypothetical, optimally chosen specific classification rule|
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