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Market exit through divestment: the effect of accounting bias on competition

Chen, Hui and Jorgensen, Bjorn (2018) Market exit through divestment: the effect of accounting bias on competition. Management Science, 64 (1). pp. 164-177. ISSN 0025-1909

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Identification Number: 10.1287/mnsc.2016.2578

Abstract

We analyze the effect of accounting bias on the competition and market structure of an industry. In our model, firms interim accounting reports on investment projects may contain bias introduced by the mandatory accounting system. We find that this bias strictly decreases firm's profits when investors do not have an abandonment option, but different results emerge when we allow the investors to divest in the interim. Specifically, a conservative accounting regime may increase the likelihood of projects being discontinued, inducing some firms to exit from the product market and leaving rivals to capture their market share. A conservative regime can thus soften market competition and result in ex ante higher investment payoff, higher consumer surplus, and higher total social welfare. Since industries often have common reporting standards, we also identify the degrees of industry-wide accounting bias that maximize the expected investor payoffs. Finally, we allow for investors to coordinate their divestment decisions when both firms report unfavorable costs and show an improvement to both firms profits and consumer surplus.

Item Type: Article
Official URL: http://pubsonline.informs.org/journal/mnsc
Additional Information: © 2016 INFORMS
Divisions: Accounting
Subjects: H Social Sciences > HF Commerce > HF5601 Accounting
Sets: Departments > Accounting
Date Deposited: 29 Oct 2015 10:08
Last Modified: 20 Nov 2019 05:22
URI: http://eprints.lse.ac.uk/id/eprint/64217

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