Melbourne Accounting Research Seminar - Professor Jeroen Suijs

Professor Jeroen Suijs from Erasmus University will present a MARS seminar.

Topic: Financial reporting standards with investment efficiency in growth firms

Abstract: We analyze the role of financial reporting standards (backward vs. forward looking, conservative vs. aggressive) in stimulating investment efficiency in growth firms. In a dynamic investment game where the investor faces uncertainty regarding the duration that a firm is able to generate profitable growth opportunities, we show that underin vestment and overinvestment may arise. We show that perfect backward looking financial information ameliorates both the overinvestment and the underinvestment problems from a social standpoint. Perfect forward looking financial information ameliorates the underinvestment problem better than backward looking financial information does and it completely resolves the overinvestment problem. We further consider aggressive and conservative reporting in a mixed attribute financial reporting system that combines perfect backward looking financial information with noisy forward looking financial information. We find that aggressive reporting better addresses the issue of under-investment while conservative reporting better addresses the issue of overinvestment. It suggests that counter-cyclical reporting standards address investment inefficiencies better than pro-cyclical reporting standards.