No. 30: Accounting Measurement Intensity


We propose an empirical measure of metering problems, i.e., the difficulties of measur-
ing productivity and rewards in firms. We build on the insight that these metering
problems are reflected in the intensity with which firms apply Generally Accepted
Accounting Principles when preparing their financial statements to capture economic
transactions. We adapt a simple computational linguistics algorithm to identify textual
patterns that uniquely signify heightened use of accounting measurement in prepara-
tion of accounting reports. We validate the output of this algorithm before computing
time-varying, firm-level scores of accounting measurement intensity (AMI). We then
show that AMI is associated with the decisions of professional users of accounting
information. We also document that AMI is correlated with the cross-section of ex-
pected equity returns and with the cost of debt and non-price terms in the private loan
market. In CEO compensation contracts, we see lower pay-performance sensitivity
to accounting performance metrics as AMI increases. Finally, we report that AMI
correlates with investment and hiring decisions in firms; factor productivity, as well as
the efficiency of resource allocation. Together, these findings are consistent with the
predictions in Alchian and Demsetz (1972) about how metering problems affect the
boundary of the firm.


Participating Institutions

TRR 266‘s main locations are Paderborn University, HU Berlin, and University of Mannheim. All three locations have been centers for accounting and tax research for many years. They are joined by researchers from LMU Munich, Frankfurt School of Finance and Management, WHU – Otto Beisheim School of Management, European School of Management and Technology in Berlin and Goethe University Frankfurt who share the same research agenda.