“The Real Effect of Financial Reporting: A Quantitative Assessment” – by Prof. Pierre Liang
Professor Pierre Liang
Professor of Accounting
Tepper School of Business
Carnegie Mellon University
To examine the role of financial reporting in improving aggregate investment efficiency, we embed a real-effect model of financial reporting into the neoclassical dynamic investment framework. Within the framework, we quantify the degree of reporting quality in the aggregate data and evaluate its economic consequences through an investment channel. Our calibration result suggests that a near doubling in reporting quality would lead to a 5.5% increase in long run firm output, representing a sizable benefit to the real economy. Additionally, our counterfactual experiments shed light on how financial reporting may play an even more important role in light of the recent changes in the economy such as more uncertain productivity shocks and changes in the labor-capital share of national income.