Pierre Liang | Carnegie Mellon University (original) (raw)
Papers by Pierre Liang
American Economic Review, 2003
SSRN Electronic Journal, 2003
SYNOPSIS: Accounting standards have moved to include more and more forecasts, while the public ex... more SYNOPSIS: Accounting standards have moved to include more and more forecasts, while the public expects financial statement figures to be much more solid than they actually are. To reduce the expectations gap, between investors' perceptions of the hardness of financial information and the reality, we explore "intertemporal financial statements". Their amounts are presented in three columns, "realized," "expected," and "total," where the total column is exactly the same as those in conventional statements. All completed transactions and all cash transactions appear in the realized column and all non-cash transactions awaiting terminating transactions appear in the expected column. Each column is like pre-consolidation statements for a subsidiary and balances on its own in all statements. Investors and regulators will welcome this added breakdown of conventional numbers since hard and soft numbers are clearly separated for a better assessment of corporate financial positions and performances. Managers will also prefer intertemporal financial statements if they provide protection against lawsuits that could arise when estimates differ from realizations.
Journal of Accounting & Economics, 2005
Accounting Review, 2010
In this paper I advocate and illustrate a new approach to the study of accounting measurement and... more In this paper I advocate and illustrate a new approach to the study of accounting measurement and disclosure that is strikingly different from the usual studies of disclosure in pure exchange economies. This new approach studies the "real effects" of accounting disclosure, arguing that how accountants measure and report firms' economic transactions, earnings and cash flows to capital markets has strong effects on firms' real decisions and on resource allocation in the economy. I explicitly study the real effects of accounting for firms' intangible investments and accounting for firms' derivatives/hedge activities. I also shed new light on more fundamental accounting issues such as the real effects of imprecision in accounting measurement and the real effects of periodic performance reporting. Studies of real effects have the potential to inform accounting policy debates since they are built around very specific economic transactions and their accounting treatment.
European Accounting Review, 2004
Intertemporal aggregation results in a summarization of information and a natural delay in the re... more Intertemporal aggregation results in a summarization of information and a natural delay in the release of information. We study a principal–agent model and show that intertemporal aggregation can be an optimal feature of a performance evaluation system. We then highlight subtleties associated with valuing additional information as the level of aggregation of existing information is varied.
In this paper, we investigate how the accounting measurement basis a¤ects the capital market pric... more In this paper, we investigate how the accounting measurement basis a¤ects the capital market pricing of a …rm's shares, which, in turn, a¤ects the e¢ ciency of the …rm's investment decisions. We distinguish two broad bases for accounting measurements: input-based and outputbased accounting. We argue that the structural di¤erence in the two measurement bases leads to a systematic di¤erence in the e¢ ciency of the investment decisions. In particular, we show that an output-based measure, such as a fair value measure, has a natural advantage in aligning investment incentives because of its comprehensiveness. The (…rst-) best investment is achieved when the output-based measure is noiseless and manipulation-free. However, in practice, outputbased measures may be highly noisy and easy to manipulate, in which case the induced investment e¢ ciency can be quite low. This is because under an output-based measure, investment ine¢ ciency and accounting noise/manipulability are always complements: more accounting noise/manipulation leads to more ine¢ cient investment choices. On the other hand, an input-based measure, such as a historical cost measure, may induce more e¢ cient investment decisions than an output-based measure even though it is not as comprehensive. The reason is two-fold. First, input-based measures are typically associated with less noise and limited manipulation. Second and more importantly, we show that under an input-based measure, investment ine¢ ciency and accounting noise/manipulability may be substitutes: a slight increase in accounting noise/manipulation may lead to more e¢ cient investment choices. In fact, the (…rst-) best result is achieved when the noise/manipulability is small but positive. In other words, for an input-based measure, being less comprehensive makes small but positive accounting noise/manipulability desirable.
We argue that the lack of academic proficiency in K-12 education is due to information asymmetry ... more We argue that the lack of academic proficiency in K-12 education is due to information asymmetry between the policy-maker, households, and schools. The policy-maker is thus unable to write down efficient contracts to ensure proficiency, and must incur agency costs which, in turn, generate other distortions. We develop a theoretical equilibrium model where schools and households choose their efforts in response to the policymaker's incentives. We model public schools as one possible response to informational failures. Unlike private schools, public schools separate the roles of financing and consuming education, thus creating rents for public schools. We develop a computational version of the model that allows us to illustrate the distortions and effects from alternative contracts.
We present a model in which a firm both learns from and discloses to stock market. We show that t... more We present a model in which a firm both learns from and discloses to stock market. We show that the firm's learning from stock price could impose an endogenous cost on its disclosure even though the information disclosed by the firm is independent of that the firm learns from stock price. Learning from market is beneficial because real investment decisions can be improved. Disclosing to market is also beneficial because it limits the opportunistic investment discretion enjoyed by the self-interested manager. However, our analysis demonstrates a potential conflict between the two benefits. The learning by the firm links the speculator's information acquisition incentive to the firm's disclosure, and creates a tradeoff for corporate disclosure. This tradeoff highlights the endogenous cost for the firm to learn from the stock market and reflects the fundamental discrepancy between the objective of the firm (i.e., maximize firm value) and that of the speculator (i.e., maximize trading profit).
Management Science, 2009
A criticism of mechanism design theory is that the optimal mechanism designed for one environment... more A criticism of mechanism design theory is that the optimal mechanism designed for one environment can produce drastically different actions, outcomes, and payoffs in a second, even slightly different, environment. In this sense, the theoretically optimal mechanisms usually studied are not "robust." In order to study robust mechanisms while maintaining an optimal contracting approach, we study a multiagent model in which the contract must be designed before the environment is as well understood as is usually assumed. The particular model is of an auction setting. Our main result is that if the prior about the correlation in the agents' environments is diffuse enough, the optimal Bayesian-Nash auction is a simple dominant strategy auction (a modified second-price auction) that completely ignores the correlation in the agents' environments.
In this essay, I wish to invite young scholars to learn, use, and contribute to accounting theory... more In this essay, I wish to invite young scholars to learn, use, and contribute to accounting theory. In this invitation, I argue theory has lineage, is important and can be fun. Its lineage comes from the post-WWII scientific revolution in management education and research. Theory is important because it is the successful interaction between theory and empirical work that ultimately advances an academic discipline. Theory can be fun because when done well, learning, using and contributing to theory can be an enjoyable activity for all scholars, either as consumers or as producers of theory.
American Economic Review, 2003
SSRN Electronic Journal, 2003
SYNOPSIS: Accounting standards have moved to include more and more forecasts, while the public ex... more SYNOPSIS: Accounting standards have moved to include more and more forecasts, while the public expects financial statement figures to be much more solid than they actually are. To reduce the expectations gap, between investors' perceptions of the hardness of financial information and the reality, we explore "intertemporal financial statements". Their amounts are presented in three columns, "realized," "expected," and "total," where the total column is exactly the same as those in conventional statements. All completed transactions and all cash transactions appear in the realized column and all non-cash transactions awaiting terminating transactions appear in the expected column. Each column is like pre-consolidation statements for a subsidiary and balances on its own in all statements. Investors and regulators will welcome this added breakdown of conventional numbers since hard and soft numbers are clearly separated for a better assessment of corporate financial positions and performances. Managers will also prefer intertemporal financial statements if they provide protection against lawsuits that could arise when estimates differ from realizations.
Journal of Accounting & Economics, 2005
Accounting Review, 2010
In this paper I advocate and illustrate a new approach to the study of accounting measurement and... more In this paper I advocate and illustrate a new approach to the study of accounting measurement and disclosure that is strikingly different from the usual studies of disclosure in pure exchange economies. This new approach studies the "real effects" of accounting disclosure, arguing that how accountants measure and report firms' economic transactions, earnings and cash flows to capital markets has strong effects on firms' real decisions and on resource allocation in the economy. I explicitly study the real effects of accounting for firms' intangible investments and accounting for firms' derivatives/hedge activities. I also shed new light on more fundamental accounting issues such as the real effects of imprecision in accounting measurement and the real effects of periodic performance reporting. Studies of real effects have the potential to inform accounting policy debates since they are built around very specific economic transactions and their accounting treatment.
European Accounting Review, 2004
Intertemporal aggregation results in a summarization of information and a natural delay in the re... more Intertemporal aggregation results in a summarization of information and a natural delay in the release of information. We study a principal–agent model and show that intertemporal aggregation can be an optimal feature of a performance evaluation system. We then highlight subtleties associated with valuing additional information as the level of aggregation of existing information is varied.
In this paper, we investigate how the accounting measurement basis a¤ects the capital market pric... more In this paper, we investigate how the accounting measurement basis a¤ects the capital market pricing of a …rm's shares, which, in turn, a¤ects the e¢ ciency of the …rm's investment decisions. We distinguish two broad bases for accounting measurements: input-based and outputbased accounting. We argue that the structural di¤erence in the two measurement bases leads to a systematic di¤erence in the e¢ ciency of the investment decisions. In particular, we show that an output-based measure, such as a fair value measure, has a natural advantage in aligning investment incentives because of its comprehensiveness. The (…rst-) best investment is achieved when the output-based measure is noiseless and manipulation-free. However, in practice, outputbased measures may be highly noisy and easy to manipulate, in which case the induced investment e¢ ciency can be quite low. This is because under an output-based measure, investment ine¢ ciency and accounting noise/manipulability are always complements: more accounting noise/manipulation leads to more ine¢ cient investment choices. On the other hand, an input-based measure, such as a historical cost measure, may induce more e¢ cient investment decisions than an output-based measure even though it is not as comprehensive. The reason is two-fold. First, input-based measures are typically associated with less noise and limited manipulation. Second and more importantly, we show that under an input-based measure, investment ine¢ ciency and accounting noise/manipulability may be substitutes: a slight increase in accounting noise/manipulation may lead to more e¢ cient investment choices. In fact, the (…rst-) best result is achieved when the noise/manipulability is small but positive. In other words, for an input-based measure, being less comprehensive makes small but positive accounting noise/manipulability desirable.
We argue that the lack of academic proficiency in K-12 education is due to information asymmetry ... more We argue that the lack of academic proficiency in K-12 education is due to information asymmetry between the policy-maker, households, and schools. The policy-maker is thus unable to write down efficient contracts to ensure proficiency, and must incur agency costs which, in turn, generate other distortions. We develop a theoretical equilibrium model where schools and households choose their efforts in response to the policymaker's incentives. We model public schools as one possible response to informational failures. Unlike private schools, public schools separate the roles of financing and consuming education, thus creating rents for public schools. We develop a computational version of the model that allows us to illustrate the distortions and effects from alternative contracts.
We present a model in which a firm both learns from and discloses to stock market. We show that t... more We present a model in which a firm both learns from and discloses to stock market. We show that the firm's learning from stock price could impose an endogenous cost on its disclosure even though the information disclosed by the firm is independent of that the firm learns from stock price. Learning from market is beneficial because real investment decisions can be improved. Disclosing to market is also beneficial because it limits the opportunistic investment discretion enjoyed by the self-interested manager. However, our analysis demonstrates a potential conflict between the two benefits. The learning by the firm links the speculator's information acquisition incentive to the firm's disclosure, and creates a tradeoff for corporate disclosure. This tradeoff highlights the endogenous cost for the firm to learn from the stock market and reflects the fundamental discrepancy between the objective of the firm (i.e., maximize firm value) and that of the speculator (i.e., maximize trading profit).
Management Science, 2009
A criticism of mechanism design theory is that the optimal mechanism designed for one environment... more A criticism of mechanism design theory is that the optimal mechanism designed for one environment can produce drastically different actions, outcomes, and payoffs in a second, even slightly different, environment. In this sense, the theoretically optimal mechanisms usually studied are not "robust." In order to study robust mechanisms while maintaining an optimal contracting approach, we study a multiagent model in which the contract must be designed before the environment is as well understood as is usually assumed. The particular model is of an auction setting. Our main result is that if the prior about the correlation in the agents' environments is diffuse enough, the optimal Bayesian-Nash auction is a simple dominant strategy auction (a modified second-price auction) that completely ignores the correlation in the agents' environments.
In this essay, I wish to invite young scholars to learn, use, and contribute to accounting theory... more In this essay, I wish to invite young scholars to learn, use, and contribute to accounting theory. In this invitation, I argue theory has lineage, is important and can be fun. Its lineage comes from the post-WWII scientific revolution in management education and research. Theory is important because it is the successful interaction between theory and empirical work that ultimately advances an academic discipline. Theory can be fun because when done well, learning, using and contributing to theory can be an enjoyable activity for all scholars, either as consumers or as producers of theory.