Strategic Accounting Choice and the Effects of Alternative Financial Reporting Requirements

Abstract

In this paper, I evaluate the effects of mandatory changes in accounting standards on firms' disclosure decisions. Several issues are addressed, including the relation between mandatory reports and voluntary disclosures, the effects of imposing consistency in accounting choice, the consequences of increasing firms' discretion in accounting procedures, and the implications of requiring firms to issue more detailed accounting reports. The analysis of each of these issues depends critically on the firm's motivation for choosing among financial reporting techniques. Throughout this paper, I assume that a firm's choice among reporting requirements is influenced by how that choice alters its ability to protect its proprietary information. Since this is not a common assumption, some comment on its appropriateness is warranted. One of the limitations of most discussions of mandatory accounting reporting procedures is that these discussions give little attention to firms' incentives not to disclose information voluntarily. This results in a Catch-22. If firms have no incentives to withhold their information, then analyses of the amount of information produced by various mandatory reports are moot, since any information not supplied in mandatory