Accounting Uniformity, Comparability, and Resource Allocation Efficiency

Uniformity, the use of a common accounting measurement, is an essential feature of financial reporting, yet its desirability has long been debated. We study a model in which firms decide whether to adopt either their local accounting methods or a common method, followed by an investor allocating capital across firms. We model comparability as a possible but not necessarily ensuing outcome of uniformity that renders accounting reports more informative about productivity differences among firms. Firms' choices of a common method are strategic complements on attaining more comparable reports. As a result, multiple equilibria may exist in the economy, and firms may fail to coordinate on adopting a Pareto-optimal accounting method. Specifically, a Pareto-optimal equilibrium in which all firms use a common accounting method (the common equilibrium) may be risk-dominated by an equilibrium in which each firm uses its optimal local method (the local equilibrium). Moreover, if investments exhibit substitutability, the universal use of a Pareto-optimal common accounting method may not even be an equilibrium. In contrast, a universal use of a Pareto-suboptimal common accounting method can be an equilibrium, especially if investments exhibit complementarity. These coordination problems provide accounting regulation an opportunity to facilitate the efficient allocation of capital in the economy. Thus, our results provide a micro-foundation for accounting measurement regulation and elucidate the impact of accounting uniformity on resource allocation efficiency