Alternative Accounting Methods, Information Asymmetry and Liquidity: Theory and Evidence

The Accounting Review
Vol. 71:3  1996

Eli Bartov
Stern School, New York University

Gordon M. Bodnar
Wharton School, University of Pennsylvania, and NBER

Abstract:

Previous research has demonstrated that information asymmetry translates into higher transaction costs for trading shares of the firm which, in turn, raise the required rate of return and lower current stock price. The information asymmetry perspective suggest that, ceteris paribus, managers wishing to maximize the value of their firms have incentives to reduce the degree of information asymmetry by switching to newly available accounting techniques which make financial statements more informative to investors. Firms with greater information asymmetry are predicted to be more likely to switch to more informative accounting methods when they become available. Tests on the choice of functional currency among U.S. multinational firms support these predictions after controlling for variables such as the debt-equity ratio, interest coverage, size, and the relative size, of the foreign currency adjustment in the financial statement.