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By Chandra Kanodia

Accounting Disclosure and actual results offers a brand new method of the research of accounting size and disclosure that demanding situations the present accounting literature. This new strategy - the "real results" point of view - argues that how enterprises' monetary transactions, gains, and capital flows are measured and mentioned to the capital markets has immense results at the companies' actual judgements and at the allocation of assets within the economic system usually. Accounting Disclosure and actual results can be required studying for accounting regulators and company managers who've to accommodate substitute accounting criteria and disclosure necessities. This landmark survey is the one resource to target the genuine results method of the learn of disclosure.

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Thus, the accounting reports produced in the intangibles measurement regime are m IK = K+η m IN = N +γ−η+ω z m = x1 − K − N − γ 44 Real Effects of Measuring Intangibles y m = z + IK + IN = x1 − K − N − γ + (K + η) + (N + γ − η + ω) = x1 + ω. I have introduced two new random variables, η and ω. The random variable η represents classification errors between tangible and intanm gible assets. Therefore, its effect is offsetting in the measurements IK m . The random variable ω represents misclassifications between and IN operating expenditures and expenditures on intangible assets.

When the market observes an accounting report of investment that does not coincide with its perfect anticipation it attributes the difference to measurement noise and ignores the accounting report. , c(k) = 12 ck 2 and v(k, θ) = γkθ, γ > 0. Then first best investment is kFB (θ) = 1+γ θ, while myopic investment is kM (θ) = 1c θ. c Thus if γ = 10, corresponding to a price earnings multiple of 10, myopic investment would be one-eleventh of first best investment and the value of the firm would be one-eleventh of its first best value.

The under-investment in tangible investments occurs because of the complimentarity with intangibles — the decrease in intangibles drags down the investment in tangibles by reducing its marginal returns. In a classic value relevance study, Lev and Sougiannis (1996) find that regressions that include an estimate of intangibles provide a better fit with observed prices and returns in the capital market than regressions that do not include such an estimate. This result is fully consistent with the analysis here, which indicates that the market forms a rational estimate of intangible investments and prices the firm in accordance with such an estimate.

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