Asset Measurement, Real Effects and the Financial Accelerator

• In Event: Financial Accounting Theory

Abstract

Should the measurement of productive assets be managed to ease the real effects of financial shocks? While current institutions do not emphasize such a function, the theory developed here suggests a positive answer to this question. I examine how the measurement should respond to a credit market contraction and argue that the real
sector will respond very differently under the optimal measurement than it would under complete information. Among other things, managed measurements may create multiple self-fulfilling equilibria and the optimal measurement may seemingly magnify financial shocks. The theory provides numerous other insights about the relationship between the financial accelerator and asset measurement choices.

Authors

• Jeremy Bertomeu, Baruch College–CUNY

• Edwige Cheynel, Columbia University