Pierre Jinghong Liang

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  • On the Social Value of Accounting Objectivity in Financial Stability
  • Abstract:
    In this paper, we analyze the social value of accounting objectivity in maintaining financial stability. Building on an early, influential accounting work by Ijiri and Jaedicke (1966), we operationalize two informational properties, accuracy and objectivity, in a correlated information structure and embedded them into a model of runs on financial institutions. We show that, when compared with the accuracy property, the objectivity property exhibits a comparative advantage in mitigating inefficient, panic-based runs. In fact, it is possible that improving objectivity discourages while improving accuracy encourages such runs. Our model also sheds light on the design of optimal accounting systems to enhance objectivity. We find that, in order to generate a more objective accounting report, accounting systems should be designed to be less subject to intentional managerial intervention.