Header

UZH-Logo

Maintenance Infos

Market exit through divestment - the effect of accounting bias on competition


Chen, Hui; Jorgensen, Bjorn N. (2018). Market exit through divestment - the effect of accounting bias on competition. Management Science, 64(1):164-177.

Abstract

We analyze the effect of accounting bias on the competition and market structure of an industry. In our model, firms’ interim accounting reports on investment projectsmay contain bias introduced by the mandatory accounting system. We find that this biasstrictly decreases firms’ profits when investors do not have an abandonment option, butdifferent results emerge when we allow the investors to divest in the interim. Specifically,a conservative accounting regime may increase the likelihood of projects being discontin-ued, inducing some firms to exit from the product market and leaving rivals to capturetheir market share. A conservative regime can thus soften market competition and resultin ex ante higher investment payoff, higher consumer surplus, and higher total socialwelfare. Since industries often have common reporting standards, we also identify thedegrees of industry-wide accounting bias that maximize the expected investor payoffs.Finally, we allow for investors to coordinate their divestment decisions when both firmsreport unfavorable costs and show an improvement to both firm profits and consumer surplus.

Abstract

We analyze the effect of accounting bias on the competition and market structure of an industry. In our model, firms’ interim accounting reports on investment projectsmay contain bias introduced by the mandatory accounting system. We find that this biasstrictly decreases firms’ profits when investors do not have an abandonment option, butdifferent results emerge when we allow the investors to divest in the interim. Specifically,a conservative accounting regime may increase the likelihood of projects being discontin-ued, inducing some firms to exit from the product market and leaving rivals to capturetheir market share. A conservative regime can thus soften market competition and resultin ex ante higher investment payoff, higher consumer surplus, and higher total socialwelfare. Since industries often have common reporting standards, we also identify thedegrees of industry-wide accounting bias that maximize the expected investor payoffs.Finally, we allow for investors to coordinate their divestment decisions when both firmsreport unfavorable costs and show an improvement to both firm profits and consumer surplus.

Statistics

Citations

Dimensions.ai Metrics
1 citation in Web of Science®
1 citation in Scopus®
Google Scholar™

Altmetrics

Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Business Administration
Dewey Decimal Classification:330 Economics
Language:English
Date:2018
Deposited On:21 Aug 2019 15:39
Last Modified:25 Sep 2019 00:41
Publisher:United States Informs
ISSN:0025-1909
OA Status:Closed
Publisher DOI:https://doi.org/10.1287/mnsc.2016.2578
Other Identification Number:merlin-id:18033

Download

Full text not available from this repository.
View at publisher

Get full-text in a library