...accountants and report firms' economic transactions, earnings, and cash flows to capital markets has substantial effects on firms' real decisions and, more generally, on resource allocation in the economy. In most of the extant literature, firms are exogenously endowed with liquidating dividends that are independent of the accounting regime, and the role of accounting disclosure is to provide information about these liquidating dividends. When real effects are present, they arise in one of two ways, contractual efficiency or proprietary costs. The former perspective is that contracts among economic agents with conflicting interests are often based on accounting data and better information makes these contracts more efficient. For example, information provided to firm's board of directors for evaluating and rewarding managerial performance could enhance the efficiency of compensation contracts, decrease risk premiums paid to managers, change managerial effort, and hence have real effects. The proprietary cost perspective is that disclosures have real effects because they inform competing firms in product markets...

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