We study the optimal accounting policy of a financially constrained firm that pledges assets to raise debt capital for financing a risky project. The accounting system provides information about the value of the collateral. Absent accounting regulation, the optimal accounting system is...

We analyze the optimal accounting policy of a financially constrained firm that needs to pledge assets in order to raise debt capital to finance a risky project. The accounting system provides information about the value of the collateral. We show that, absent any accounting regulation, the firm...