Accounting Discretion

Corporate Governance

Creating and Accounting Discretion Index (ADI).


May 7, 2022

Accounting discretion around the world: what are the outcomes?

Previous corporate governance literature suggests that investors and regulators fear possible opportunistic behaviors coming from managerial discretion; thus, mechanisms (such as governance mechanisms and legal rules) are placed to reduce their discretion. This literature usually defines managerial discretion as the latitude of action allowed to managers and uses firm-level configurations (such as low levels of leverage or ownership concentration) to proxy for it. In this manuscript, we propose a different form of discretion coming from accounting rules, which we name as accounting discretion. Specifically, we investigate systematic differences in accounting that are linked with or provide discretion to managers in 52 countries. We use local accounting rules to assess accounting discretion and to build an index measuring the level of accounting discretion allowed in each country. Our accounting discretion index suggests there is significant variability across the 52 countries in our sample. We argue that understanding country-level variability in accounting discretion is crucial to understand overall managerial discretion at the firm-level. We contribute to the literature by providing an objective measure of accounting discretion across different countries.

Co-authored with Marcio Pimenta (PhD Candidate).

The first article of this project was accepted for presentation at the 6th annual International Corporate Governance Society (ICGS) conference to be held November 14 - 16, 2020.