Pingyang Gao's research while affiliated with University of Chicago and other places
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Publications (23)
Discrete recognition is a long-standing and ubiquitous accounting practice, but it has been widely criticized for suppressing information and inducing accounting-motivated transactions. We study a model to examine the economic consequences of shifting away from discrete recognition to a continuous measurement approach. Without manipulation, discret...
This paper examines the effects of idiosyncratic accounting information on a firm's cost of capital. By embedding a moral hazard problem into a multi‐firm asset pricing model, I show that moral hazard distorts the sharing of idiosyncratic risk but does not affect the sharing of systematic risk in the economy. A firm‐level improvement in idiosyncrat...
We propose a model to study how auditing standards affect audit quality. We posit that both auditors' incentives and expertise are relevant for audit effectiveness. Auditing standards are useful in mitigating the auditors' possible misalignment of interest with investors. However, auditing standards also restrict auditors' exercise of professional...
The adoption of common accounting standards generates both a precision effect and a network effect. When firms use common standards, investors can leverage their knowledge about the standards to process more financial reports. Embedding both effects into the economic framework of Baiman and Verrecchia (1995, 1996), we study the adoption's effects o...
We study firms' investment in internal controls to reduce accounting manipulation. We first show that peer managers' manipulation decisions are strategic complements: one manager manipulates more if he believes that reports of peer firms are more likely to be manipulated. As a result, one firm's investment in internal controls has a positive extern...
This paper investigates banks’ reporting choices in the context of bank runs. A fundamental-based run imposes market discipline on insolvent banks, but a panic-based run closes banks that could have survived with better coordination among creditors. We augment a bank-run model with the bank’s reporting choices. We show that banks with intermediate...
This paper investigates the economic consequences of a financial institution’s reporting discretion in the context of bank runs. A fundamental-based run imposes market discipline on insolvent institutions, but a panic-based run shuts down institutions that could have survived with better coordination among investors. We augment a bank-run model wit...
Classifications and thresholds are common in accounting rules. This paper explains one benefit of a binary classification and studies the properties of an optimal threshold in a model with managers’ opportunistic influence on raw evidence. A threshold that partitions raw evidence to a binary classification affects not only the ex post use of inform...
While most accounting information is idiosyncratic in nature, economy-wide factors such as accounting standards affect the quality of idiosyncratic accounting information of many firms simultaneously. We study idiosyncratic and systematic features of accounting information by embedding a parsimonious, moral hazard problem into the framework of a mu...
We study the ex-ante efficiency of mark-to-market accounting (MTM) in a loan market by taking into account its real effects on banks’ origination and retention decisions. Despite its benefit of improved valuation accuracy, MTM could reduce the overall efficiency of the economy. The efficiency loss results from the central idea of the paper: the att...
Trading in a secondary stock market not only redistributes wealth among investors but also generates information that guides subsequent investment. We provide a positive theory of disclosure that reflects both functions of a secondary market. By making private information public, disclosure reduces private information acquisition and levels the pla...
Trading in a secondary stock market not only redistributes wealth among investors but also generates information that guides subsequent investment. We provide a positive theory of disclosure that reects both functions of the secondary stock market. On one hand, disclosure improves …rm value by ameliorating adverse selection among investors. On the...
It is widely believed that disclosure quality improves investors' welfare by reducing cost of capital in a competitive market. This paper examines this conventional wisdom by studying a production economy in which disclosure influences a firm's investment decisions. I demonstrate three points. First, cost of capital could increase with disclosure q...
Why managers exercise their stock options much earlier than their options' expiration dates remains an empirical question. I examine whether managers' early option exercises are related to their private information on future risks. I find that the earliness of option exercises is positively associated with firms' future idiosyncratic risks. However...
This paper addresses the question of whether cost of capital is a sufficient statistic for the welfare of current and/or new investors in the analysis of the economic consequences of disclosure quality. I identify the necessary and sufficient conditions under which disclosure quality reduces cost of capital and improves the welfare of current and n...
Abstract It has long been recognized that padding of budgets is a concern that can complicate the practice of resource allocation. At the same time, experimental evidence suggests budget padding is somewhat restrained by a managerial preference for honesty. This paper models the confluence of these two incentives and considers the effect on optimal...
Why managers exercise their stock options much earlier than options' expiration dates remains an empirical question. I examine whether managers exercise their stock options early in anticipation of changes in the direction of and uncertainty about firms' future performance. I find that the early exercises are followed by unexpected declines in firm...
I use the incomplete contracts approach to distinguish accounting recognition from disclosure. Accounting recognition settles contracts while disclosure facilitates arms-length transactions. The endogenous power of recognition in settling contracts unilat-erally makes it vulnerable to inuence activities more than disclosure. In particular, recognit...
We present a model in which a firm both learns from and discloses to stock market. We show that the firm's learning from stock price could impose an endogenous cost on its disclo- sure even though the information disclosed by the firm is independent of that the firm learns from stock price. Learning from market is beneficial because real investment...
Citations
... Geraci et al., 2018;Purnanandam & Seyhun, 2018). The trade-off between the positive and negative aspects of short selling in financial markets has fuelled an ongoing debate about the necessity of short-selling regulations (Beber and Pagano, 2013;Gao et al., 2020). ...
![[object Object]](https://i1.rgstatic.net/ii/profile.image/273626289143836-1442249000004_Q64/Xu-Jiang-14.jpg)
... In the assessment field, Gulin et al. (2019) identified areas of digitization and automation applications, such as AI, Blockchain, continuous accounting, and Big Data. For example, continuous accounting is a decline in this technological innovation that no longer aims at a periodic analysis of financial information but offers the possibility of providing new information daily (Gao & Jiang, 2020;Schmitz & Leoni, 2019). Technological developments that can lead to accountability have also been explored (Vȃrzaru, 2022). ...
... In addition to credit risk, lending spreads include compensation for systematic risk and nondiversifiable idiosyncratic risk (Amiram et al. 2017). Theory suggests that these risks vary with the corporate life cycle (Chowdhury and Chowdhury 2001;Gao 2019). ...
Reference: Firm Life Cycle and Cost of Debt
... Understanding and assessing the internal controls over information systems become integral as technology becomes deeply intertwined with business processes. This adaptability ensures that auditors remain equipped to navigate the evolving technological landscape and uphold the highest standards of audit quality (Gao & Zhang, 2019, Reid, et. al., 2019. ...
![[object Object]](https://i1.rgstatic.net/ii/profile.image/1146959486296075-1650467859314_Q64/Gaoqing-Zhang.jpg)
... The impact of accounting uniformity has also been examined in the context of information processing costs. For instance, Barth, Clinch, and Shibano (1999) and Gao, Jiang, and Zhang (2019) examine the benefits of harmonizing domestic and foreign accounting standards in terms of reducing information-processing costs. Similarly, Ray (2018) compares the benefits of lower information processing costs with the increased compliance costs brought about by Accounting Uniformity, Comparability, and Resource Allocation Efficiency 3 ...
... A robust internal control environment with effective business processes is crucial because it aids management in protecting shareholder welfare (Andreou et al., 2016). Management establishes internal controls and operating procedures that protect company assets and minimize the risk of fraud or abuse (Gao & Zhang, 2019). As evidenced by a robust internal control environment, corporate governance establishes acceptable employee behavior and allows an organization to have consistent process activities. ...
... At t ¼ 0, the bank is endowed with an investment project that yields a stochastic gross rate of return 1 þr realized at t ¼ 3. Similar to Morris and Shin (2000), Gao and Jiang (2018), and Liang and Zhang (2019), the bank's project is illiquid and the net rate of return obtainable at t ¼ 3 is decreasing in the proportion of investments withdrawn at t ¼ 2, as denoted by l 2 ½0, 1. Specifically, we assume that at t ¼ 3, the net rate of return is 1 þr À dl. ...
Reference: Optimal Reporting Systems in Bank Runs
... 24 When banks adopt sale accounting for the securitized transaction, CR CR s > is met under the certain condition. 25 Therefore, under the above condition, sale accounting increases the capital ratio compared to the pre-securitization transaction. During economic booms, debtors of underlying assets are expected not to default and transferors (originators) receive principal and interest. ...
... Control environment is the supporting attitude, style and philosophy of those connected with the organization as well as their competency, morale, integrity and ethical values (Kaplan, 2013;Chen et al., 2020;Gao & Zhang, 2019). Several authors concord with the above view, when they assert that the control environment consists of structures, methods and measures that serve as a foundation for evaluating the internal control framework (Chalmers et al., 2019;Kinyua, Gakure, Gekara, & Orwa, 2015;Vu & Nga, 2022). ...
... This also applies to stress test disclosure, as banks have considerable discretion in mapping their risk parameters to the adverse scenario. As shown by Gao and Jiang (2014), the incentives for misreporting are not linear in the bank's fundamentals. Very 'good' and very 'bad' banks have less incentive for misreporting, while banks in between wish to avoid panic-based runs. ...
