Formerly Graduate School of Industrial Administration (GSIA)
William Larimer Mellon, Founder
Schenley Park
Pittsburgh, Pennsylvania 15213-3890
United States of America

Pierre Jinghong Liang
Associate Professor of Accounting

Accounting Treatment of Inherent versus Incentive Uncertainties and the Capital Structure of the Firm

Pierre Jinghong Liang
Carnegie Mellon University

Xiao-Jun Zhang
University of California, Berkeley
 

Journal of Accounting Research
Vol. 44, No. 1 (March 2006), pages 145-176.

 
Downloading the paper
2005-March Draft
 
Abstract
This paper studies the accounting treatment of uncertainty and how it affects the capital structure of the firm. We distinguish two sources of uncertainty that raise reliability concerns - the inherent uncertainty about the quality of the raw information regarding future cash flows (e.g., whether or not the raw information is hard enough) and the incentive uncertainty due to the potential abuse of the accounting process (e.g., whether or not the raw information is misrepresented by management). We explore features of accounting that effectively deal with these uncertainties to aid the debt-equity decision of the firm. To capture the inherent uncertainty, desirable accounting involves flexible revenue/expenses recognition rules which recognize more profit when the uncertainty level is low. To deal with the incentive uncertainty due to management misrepresentation, a stringent revenue/expense recognition rule may be preferable to fend off potential abuses.
 
 
 
   

  English Version
Last updated February 17, 2006
send comments to liangj@andrew.cmu.edu 		Chinese Version
Last updated January 6, 2004
send comments to liangj@andrew.cmu.edu