My research mostly applies theory to practical issues in financial reporting, disclosure, and auditing. I conduct research to study issues related to accounting standards, specifically the design of optimal accounting standards and the real consequences of accounting standards. I am also interested in issues related to strategic communication, tax incidence, and other topics. The page below lists my work in these areas.
Overview of my research(Numbers referred to here correspond to numbers in the papers below)
By topic:
Banking Regulation [W2, W7]
Design of Optimal Accounting/Auditing/Disclosure Standards:
- Optimal Bias [P2, P3, P8, P18, P23]
- Optimal Discretion [P4, P10]
Economic Consequences of Accounting/Auditing/Disclosure Standards [P5, P6, P7, P11, P14, P15, P17, W3, W4, W5, W6, W7]
Economic Consequences of Regulation in General (including short-selling, insider trading, penalty for unsuitable transactions, etc.) [P20, P22, W8]
Financial Histories and Trust [P1]
Heterogeneous Beliefs [P19]
Livestreaming on consumer behavior [P16]
Performance Evaluation [P9]
Strategic Communication [P12, P21, W1]
Tax Incidence [P13]
Publications (in reverse chronological order):
(P23) (Theory) Jiang, Xu, Mondria, Jordi and Yang, Liyan. “The Asset Pricing and Real Implications of Relationship Disclosure.”, forthcoming, Journal of Accounting and Economics.
What are the asset pricing implications of firms disclosing their relationships with each other, when investors are a prior uncertain about such relationships? And how does such concern about asset pricing affects firms’ decision to form a relationship in the first place? We find that while disclosing relationships has a positive price impact by increasing the expected cash flow, it also has a negative price impact by reducing the diversification benefit (or, equivalently, increasing the diversification cost) of investing in multiple firms that have more correlated cash flows. Our results imply that mandatory disclosure of firm relationships such as SFAS 131 requirement of disclosing major customers may destroy relationship development.
Keywords: firm relationships; asset prices; disclosure; matching quality; collaboration intensity
(P22) (Theory) Gao, Pingyang, Jiang, Xu and Lu, Jinzhi. “Manipulation, Panic Runs and the Short Selling Ban.” Journal of Economic Theory, Forthcoming. (WP Version)
When banks are subject to runs, is it beneficial to ban short-selling of those banks? We find such short-selling can indeed be beneficial, in particular during crisis periods when uncertainty is high, as a way to deter manipulative short-selling or bear raids.
Key Words: short selling regulation; feedback effect; strategic complementarity; bank runs; manipulative short-selling
Media Mention: Fuqua Insights and Duke Daily
I am quoted by AP news to discuss short-selling during crisis periods.
I am quoted by market place to discuss short-selling against banks.
My talk on Fuqua LinkedIn Live Series regarding this paper
My interview on KCBS radio regarding First Republic Bank.
(P21) (Theory) Jiang, Xu and Xiong, Yan, “Disclosing Endogenous Cost Information“, The Accounting Review, 100 (2): 249-268.
While prior literature often find opposite results regarding firms’ disclosure of proprietary cost information under different types of competition (Cournot versus Bertrand), we find that endogenizing such proprietary cost via firms’ investment in cost reductions can result in firms always choosing to disclose, regardless of the type of competition. However, the driving force and thus the welfare implications are drastically different: under Cournot, disclosing cost reduction helps the firm gain advantage relative to its competitor, whereas under Bertrand, disclosing (not involved) in cost reduction helps the firm coordinate better with its competitor.
Keywords: Disclosure, Cournot and Bertrand competition, innovation, cost reduction
(P20) (Theory) Jiang, Xu and Xue, Ying. “Penalizing Shirking in Discovering Unsuitability.” Review of Law and Economics 20 (2): 267-288, 2024.
How should the regulators design the optimal penalty scheme for an expert firm and a layman client against shirking in their costly interaction that helps the firm discover the unsuitable transaction, i.e. one that yields a loss for the client? The market solution to this hidden action problem fails to incentivize sufficient effort. By contrast, private contracts obtain efficiency in an alternative framework with just the firm’s unilateral effort, highlighting the role of the client’s effort in rationalizing legal intervention. Under the unique first-best policy, the firm not only refunds the client but also pays the client’s loss to the government if the firm fails to stop a transaction that ends up being unsuitable. The client receives the refund but submits the firm’s production cost to the government. The optimal punitive penalty is their total contingent loss and is robust to private contracts.
Keywords: penalty; bilateral hidden action; unsuitability; information
(P19) (Theory) Jiang, Xu and Laux, Volker. “What Role Do Corporate Boards play in Companies with Visionary CEOs?.” Journal of Accounting Research, 62 (3): 981-1005, 2024.
What role should a corporate board play in the presence of a visionary CEO who does not necessarily agree with the board? We show that the role depends on how much the CEO’s vision and the board’s vision differ. When the difference increases, the board switches from a monitoring role to an advisory role and eventually to a rubber-stamping role.
Keywords: Visionary CEOs; Corporate boards; Heterogeneous beliefs; Board advising and monitoring
Media Mention: Columbia Law School Blue Sky Blog; Fuqua Insights; Forbes India.
(P18) (Theory) Jiang, Xu, and Yang, Ming. “Optimal Accounting Rules, Private Benefits of Control, and Efficient Liquidation.“. Management Science, 70 (9): 6302-6314, 2024.
Given that managers enjoy private benefits from carrying out bad projects, how should optimal accounting rules be designed to alleviate such inefficient behavior, resulting in efficient liquidation of bad projects? We find that the optimal rule is characterized by reporting good news if and only if the fundamental of the project is higher than a threshold, with the threshold decreasing (accounting becoming less conservative) in private benefits when the level of private benefits is large. Our result suggests that more conservative accounting rules are associated with, but not the cause of, more efficient investment decisions.
Keywords: private benefits, optimal accounting rules, investment efficiency, accounting conservatism.
(P17) (Theory) Jiang, Xu, Tang, Chao and Zhang, Gaoqing. “Harmonized Accounting Standards and Investment Beauty Contests.”, The Accounting Review, 98 (7): 377-404, 2023.
What should the optimal level of accounting standards harmonization when firms’ investment exhibits beauty contest, in the sense that my investment will be more profitable if you also invest more? We actually find that the stronger the beauty-contest features, the less harmonized the standards should be, as more harmonized accounting standards make it more difficult to forecast the aggregate investment, which is more important when the beauty-contest features are stronger. We also provide implications regarding whether the regulators should mandate adopting more or less harmonized accounting standards, therefore shedding light on the topic of accounting standards harmonization including the adoption of international financial reporting standards.
Keywords: beauty contest, investment externality, information spillover, disclosure, accounting standards harmonization, IFRS Adoption.
(P16) (Empirical) Zhu, Peng, Liu, Zixi, Li, Xiaotong, Jiang, Xu, and Zhu Xuefang Mark. “The influences of livestreaming on online purchase intention: examining platform characteristics and consumer psychology“, Industrial Management & Data Systems, 123 (3), p. 862-885, 2023.
This study is a little foray into livestreaming, a quite recent phenomena in Chinese e-commerce platforms that I feel quite intrigued. We try to find out the effect of livestreaming content on online users’ cognitive and emotional reactions and those responses affect their subsequent purchase intention. We find that livestreaming has a positive effect on consumers’ perceived value and social presence, through its visual effects and sociability
Keywords: customer engagement, digital marketing, human-computer interaction, livestreaming, behavioral intention, social commerce.
(P15) (Theory) Jiang, Xu, Kanodia, Chandra and Zhang, Gaoqing. “Reporting of Investment Expenditure: Should It Be Aggregated with Operating Cash Flows?“, The Accounting Review, 98 (4): 167-190, 2023.
Given that managers have private information about the profitability of their projects and are myopic, should investment expenditures be separately measured or commingled with other operating expenses? Both methods generate inefficient levels of investment. We find that it depends on the external expected benefit and uncertainty of such profitability. Separately measuring investment is beneficial only when both the external expected benefit and uncertainty are low, consistent with the current accounting treatment for tangible investments.
Keywords: real effects, investment expenditures, expensing, capitalizing, investment efficiency.
A previous version of this paper is included in Prof. Jeremy Bertomeu’s Ph.D. seminar in accounting theory.
(P14) (Theory) Jiang, Xu, Xin, Baohua and Xiong, Yan. “The Value of Mandatory Certification: A Real-Effects Perspective“, Journal of Accounting Research, 61 (1): 377-413, 2023.
Does mandatory certification add any value (incremental to mandatory disclosure) in a setting with myopic managers making project choices? We show that mandatory certification adds value as without mandatory certification, simply requiring mandatory disclosure may be worse than not requiring anything as the managers would choose a highly risky project and report certified good results when successful and mediocre uncertified results when unsuccessful. Our results have implications for the recent SEC contemplation requiring environmental, societal, and governance (ESG) disclosures but without requiring certification (and, in reality, very few firms certify such ESG disclosure). Here is the coverage from Fuqua insight discussing some of the implications this paper, in particular, for ESG reporting.
Keywords: certification, disclosure, real effects, disclosure regulation, audit regulation, ESG disclosure.
(P13) (Theory and Empirical) Dyreng, Scott, Jacob, Martin, Jiang, Xu and Muller, Max. “Tax Avoidance and Tax Incidence.“, Contemporary Accounting Research, 39 (4): 2622-2656, 2022. (WP Version)
When shareholders of firms do not necessarily bear all of the tax burden (that is, tax incidence does not fall on them), how should that affect their tax avoidance decisions? We present a model showing the answer is ambiguous and depends, among other things, on the productivity of capital relative to labor, and the tax deductibility of labor and capital. We then empirically confirm the implications. WP version contains more technical details.
Keywords: tax avoidance, tax burden, tax incidence, labor supply elasticity, output mix, tax deductibility.
(P12) (Theory) Jiang, Xu and Xue, Ying. “Morale, performance, and disclosure.” Canadian Journal of Economics, 56 (1): 5-23, 2023.
How should the information be disclosed to the audience when the audience’s moral, which may be affected by the disclosure, determines the performance? We find that full disclosure is never optimal; either no disclosure or a threshold disclosure when only bad news below a certain threshold disclosed is optimal. Such disclosure lets the audience quit when hearing bad news (and success is unlikely) but boost the moral when no bad news is disclosed, thus boosting performance and improve welfare.
Keywords: disclosure, morale, performance, information.
(P11) (Theory) Xiong, Yan and Jiang, Xu. “Economic Consequences of Managerial Compensation Contract Disclosure.”, Journal of Accounting and Economics, 73 (2022) 101489. (WP Version)
How does disclosing managerial compensation contracts affect firms’ investment decisions, consumer surplus, and social welfare when managers are privately informed and firms are competing with each other? We find that disclosing compensation contracts exacerbates managerial myopia (as firms cannot focus on long-term if their competitors are focusing on short-term so they may not survive in the long-term). However, such competition among firms may benefit consumers and improve social welfare. Our results have implications for the Compensation Discussion and Analysis (CD&A) disclosure implemented by the SEC in 2006. The WP version contains more technical details.
Keywords: compensation contract disclosure, managerial myopia, market competition, consumer surplus.
(P10) (Theory) Jiang, Xu, and Xin, Baohua. “Financial Reporting Discretion, Managerial Myopia, and Investment Efficiency. ” The Accounting Review, 97(2): 291-316, 2022.
Should more reporting discretion be given to managers when they are myopic? Common intuition suggests the opposite, as myopic managers may use discretion to manipulate reported earnings and boost the short-term price. We find the opposite when incorporating investment: more discretion, by providing managers against the possibility that mandatory disclosure does not match voluntary disclosure, allows managers to incorporate more private information into their investment decisions, thus boosting investment efficiency and firm value.
Keywords: reporting discretion, managerial myopia, investment efficiency.
(P9) (Theory) Jiang, Xu. “Are Interim Performance Evaluations Optimal When the Evaluations Are Subject to Manipulation?” Journal of Institutional and Theoretical Economics, 177 (3): 5194-5208, 2021. (WP Version)
Should interim performance evaluations be provided when agents can manipulate the very performance reports by which they are evaluated? I find that providing interim performance evaluation is better when the agents are sufficiently risk-averse, as such interim performance evaluation provides a risk-sharing benefit, even in the presence of manipulation.
Keywords: interim performance evaluation, performance manipulation, optimal contracting.
(P8) (Theory) Chen, Qi, Huang, Zeqiong, Jiang, Xu, Zhang, Gaoqing, and Zhang, Yun. “Asymmetric Reporting Timeliness and Informational Feedback.” Management Science, 67 (8): 5194-5208, 2021. (WP Version)
SWhen managers both have private information and can learn from the stock market, should the manager disclose good news or bad news on a more timely basis? We find that the manager should disclose bad news on a more timely basis as traders are more reluctant to trade on bad news. WP version contains more technical details.
Keywords: feedback effect, earnings timeless, accounting conservatism, price efficiency, real efficiency, asymmetric reporting.
Listed on the syllabus of Prof. Robert Bushman’s Ph.D. seminar for Fall 2019.
(P7) (Theory) Gao, Pingyang, and Jiang, Xu. “The Economic Consequences of Discrete Recognition and Continuous Measurement.” Journal of Accounting and Economics, 69 (2020) 101250.
Why do accounting rules sometimes require discrete recognition (e.g., recognize revenue or not) and sometimes require continuous measurement (e.g., recognize bad debt expense using the probability of customer not paying)? We provide an explanation: discrete recognition, by coarsening information, reduces managers’ incentives to manipulate such information and increases the net informativeness of information. Discrete recognition should therefore be used if and only if managerial manipulation is more pervasive.
Keywords: discrete recognition, continuous measurement, earnings manipulation, investment efficiency.
(P6) (Theory) Gao, Pingyang, Jiang, Xu and Zhang, Gaoqing. “Firm Value and Market Liquidity around the Adoption of Common Accounting Standards” Journal of Accounting and Economics, 68 (2019) 101220.
How do adopting common accounting standards, including the worldwide adoption of international accounting reporting standards (IFRS), affect those proposals, affect firm value and market liquidity? We find that while such adoption always improves liquidity (as more investors are able to understand common accounting standards and thus participate in trading), the impact on firm value is ambiguous as one-size-fits-all common accounting standards do not necessarily result in more precise information.
Keywords: firm value, market liquidity, IFRS, common accounting standards.
(P5) (Theory) Chen, Qi, Jiang, Xu, and Zhang, Yun. “Does Audit Transparency Improve Audit Quality and Investment Efficiency?” The Accounting Review, 94(4): 189-214, 2018. (WP Version)
Audit regulators around the world are proposing more disclosure from the auditor including the audit quality indicators. How do those proposals affect investment efficiency and audit quality? We find that the answer to this question depends crucially upon the firm’s underlying reporting quality (determined by accounting rules) and the quality of auditors’ reports and it is not unambiguously beneficial. WP version provides more technical details.
Keywords: audit transparency, audit quality, investment efficiency, audit quality indicator (AQI).
Media Coverage: Fuqua Insights.
(P4) (Theory) Gao, Pingyang, and Jiang, Xu. “Reporting Choices in the Shadow of Bank Runs.” Journal of Accounting and Economics, 65(1): 85-108, 2018. (WP Version)
When bank runs pose a threat to solvent but illiquid banks, should the regulator grant bank managers more reporting discretion? Our answer is yes, as saving those solvent but illiquid banks improve welfare. We thus provide a defense for the Financial Accounting Standard Board’s decision to relax fair value accounting rules during the 2008-09 financial crisis. WP version provides more technical details.
Keywords: bank runs, reporting discretion, financial crisis.
Media Coverage: Chicago Booth Review, Fuqua Insights.
Covered in Prof. Robert Bushman’s Ph.D. seminar for Fall 2014.
(P3) (Theory) Jiang, Xu, and Yang, Ming. “Properties of optimal accounting rules in a signaling game.” Journal of Accounting and Economics 63 (2-3): 499-512, 2017.
When managers possess private information that outside investors do not know, how should accounting rules be designed to alleviate such information asymmetry, if it is prohibitively costly to reveal all the private info? We show that, under very general assumptions, the optimal accounting rule features a lower bound to assure investors that the firm value cannot go any lower, which is consistent with ex-ante accounting rules.
Keywords: information asymmetry, optimal accounting rules, signaling, accounting conservatism.
(P2) (Theory) Jiang, Xu. “Biases in Accounting and Nonaccounting information: Substitutes or Complements?” Journal of Accounting Research 54 (5): 1297-1330, 2016. (WP Version)
In the presence of bias in non-accounting information, what kind of bias should accounting information exhibit to facilitate efficient decision-making and vice versa? I find that the optimal biases of the two information complement each other, challenging the conventional wisdom that the optimal biases should be substitutes to offset each other. WP version provides more technical details.
Keywords: bias, information system, decision making.
(P1) (Experimental) Jiang, Xu., Lunawat, Rhadika, and Shapiro, Brian. “The impact of financial histories on individuals and societies: A replication of and extension of Berg el al. (1995).” Research in Experimental Economics 18 (1): 95-135, 2015.
How successive generations of lab societies organize themselves when given reports of financial transactions from previous generations. We find that such reports result in better organization, due to trust-building.
Keywords: financial reports, organization of society, trust-building, lab experiments.
Working Papers:
(W1) (Theory) Jiang, Xu and Stocken, Phil. “Public Communication between Managers and Analysts.”
Consider two firms competing with each other and an analyst that can potentially provide feedback to them. The analyst, however, may have an incentive to favor one firm versus the other. In such an environment, how would the firms and the analysts choose their communication strategy, and what are the implications for consumer surplus and social welfare? We find that uncertainty about the analyst’s incentive plays an important role in the implications. In particular, the Regulation Best Interest proposed by the SEC requiring the disclosure of analysts’ conflicts of interest may have beneficial real effects and hence enhance social welfare, by encouraging more disclosure among rival firms and the analyst.
Keywords: two-way communication, voluntary disclosure, equity analyst coverage, duopolistic competition, regulation best interest.
(W2) (Empirical) Jiang, Xu and Kubic, Matt. “FDIC Loss-Share Contracts in Failed-Bank Auctions.”
What is the benefit and cost of FDIC providing loss-sharing contracts (i.e., sharing a certain percentage of the buyer’s loss) when selling failed banks during the great recession? We provide a framework establishing that 1) loss-sharing has the benefit of increasing the auction revenue and 2) loss-sharing has the cost of increasing subsequent losses because of moral hazard. We show that the benefit is more likely to dominate during bad times. Our empirical results support our framework and show that loss-sharing indeed reduces FDIC losses.
Keywords: Fire sales; moral hazard; bank failure; auction; FDIC; loss-share; great recession
(W3) (Theory) Gao, Pingyang, Jiang, Xu and Lu, Jinzhi.. “Negotiated Accounting Measurement Rules in Debt Contracts”.
Accounting rules may exhibit measurement errors and the manager may choose to exert costly effort to privately find out suitable accounting methods that correct those errors. Given that the manager may choose to strategically withhold such findings, how should accounting measurement rules be designed to maximize efficiency? We find that 1) the manager has a tendency to
disclose certain types of errors, and 2) the manager has a tendency to exert excessive effort in finding out the suitability of the extant accounting rules. Our results reconcile the puzzle that accounting rules are designed to be conservative in the first place yet such conservative adjustments are frequently undone by lenders in the debt contracts.
Keywords: debt contracting; accounting rules; renegotiation; incomplete contracting; accounting-based covenant; accounting conservatism.
(W4) (Empirical) Ferreira, Petrus, and Jiang, Xu . “The Economic Consequences and Underlying Mechanisms Of Implementing Common Accounting Standards“.
Using the adoption of new revenue recognition standard (ASC 606), we empirically test the implications of a theory paper of mine, “Firm Value and Market Liquidity around the Adoption of Common Accounting Standards“. The theory paper predicts that common accounting standards adoption has capital market consequences through two channels: change of the precision of the accounting signal (precision effect) and change of the number of traders who are able to process accounting reports (network effect). We find that adoption of ASC 606 has the most beneficial capital market effects (in terms of liquidity) when both channels are present and no such effect when neither channels are present, consistent with theory.
Keywords: Revenue recognition, FASB, liquidity, comparability, ASC 606, ASU 2014-09
(W5) (Theory) Jiang, Xu, Sapra, Haresh, and Lu, Jinzhi. “When to force firms to shut up: Rational inattention, disclosure externalities and disclosure regulation.”
When the stock market is populated with investors of heterogenous information processing capacities, should a firm choose to disclose summary or details? We propose such a model, which formalizes the processing cost framework proposed in “Why Do Individual Investors Disregard Accounting Information? The Roles of Information Awareness and Acquisition Costs“. We find that a single firm may prefer disclosing summary as the more detailed measure exacerbates the information asymmetry between sophisticated and unsophisticated investors, resulting in unsophisticated investors quit trading and thus reduce price informativeness. In multiple-firm setting with externalities, surprisingly, firms may want to disclose more details as each firm relies on others to provide coarse disclosure to lure unsophisticated investors in and thus gets trapped in a “prisoner’s dilemma”.
Keywords: rational inattention, information processing cost, investor sophistication, summary versus details, plain language disclosure.
(W6) (Theory) Jiang, Xu, Wei, Xu, Yang, Liyan, and Zhang, Xueyong. “The Effects of Frequent Disclosure on Price Informativeness and Cost of Capital in a Keynesian Beauty Contest Setting.”
What is the effect of periodic public disclosure in an otherwise standard rational expectations equilibrium model with short-term investors, thus featuring Keynesian beauty contest? We find that periodic public disclosure generates substantially different results on how disclosure affects price informativeness and cost of capital, compared with previous literature when public disclosure after trading is absent. The introduction of future-period public information can both increase the price informativeness of the previous period through alleviating the beauty contest effect and decrease the price informativeness through crowding out the informativeness of future disclosure. Despite the
opposite effect, we find that more precise periodic disclosure unambiguously increases the informativeness of all prices, in contrast to the independence result documented in the previous literature. More precise periodic disclosure has a more subtle effect on ex-ante cost of capital,
again in contrast to the independence result documented previously.
Keywords: frequent disclosure; price informativeness; cost of capital; Keynesian beauty contest.
(W7) (Theory) Jiang, Xu and Mathieux, Lucas. “Fair Value Accounting and Debt Maturity Structure – Should we Adopt Mark-to-Funding Accounting?”
The 2023 spring of regional bank failures shows again the importance of studying the effect of fair value accounting, with this time the focus on the liability structure (i.e., insured versus uninsured deposits) of banks. We study the impact of fair value accounting on banks that vary in their liability structures. In our model, a bank screens and finances a project with both uninsured deposits and insured deposits. Uninsured deposits increase rollover risk and may generate inefficient liquidations while, at the same time, may also discipline the bank. Importantly, fair value accounting provides more timely information to investors about the underlying performance of the project than historical cost accounting. We show that fair value accounting is more likely to be welfare-enhancing when the proportion of uninsured deposits is large, as the bank then issues the optimal amount of uninsured deposits and benefits from the disciplinary role of those deposits. Otherwise, the cost from inefficient liquidations triggered by uninsured deposits dominates, resulting in historical cost being welfare-enhancing. Our results provide support for the proposed “mark-to-funding” accounting rule.
Keywords: fair value, historical cost, liability structure, moral hazard, rollover risk, financial institutions, mark-to-funding accounting.
(W8) (Empirical) Jiang, Xu, Martin, Xiumin, and Yin, Benda. “Does timely reporting of insider trading erode insiders’ trading profit?”
Section 403 of the Sarbanes-Oxley (SOX) Act of 2002 requires the accelerated reporting of insider transactions. Proponents argue that this accelerated reporting will reduce insiders’ information advantage, leading to reduced insider trading profits. Guided by an analytical model, we predict, however, that timely reporting of insider trading can increase insider trading profits, through better coordination of such trading. We find evidence that, after timelier reporting of insider transactions under Section 403 of SOX, insider trading profits increase by about 0.071%. Furthermore, the increase in profits exhibits a hump-shaped relation with the internal information asymmetry among insiders after accelerated reporting. The increase in trading profits is also more pronounced among insiders with more social connections. Overall our results suggest that timelier reporting of insider trading may increase insider trading profits through improved trading coordination.
Keywords: Insider trading, Accelerated reporting; Security regulation.
