The Effect of Uncertainty About Future Accounting Standards on Financial Reporting Quality

Financial statement preparers frequently trade off the benefit of reporting biased estimates with potential penalties for misreporting. In making this trade-off, preparers often face uncertainty about potential changes to accounting standards (“standard-setting uncertainty”) that could affect the future benefits of biased reporting. Our experiment documents two novel behavioral effects of standard-setting uncertainty on preparers’ estimates. First, standard-setting uncertainty causes preparers to make less biased estimates, even though reduced bias conflicts with their financial incentives in our setting. Second, standard-setting uncertainty increases preparers’ sensitivity to measurement imprecision, which is important for high-quality financial reporting. Although standard-setting uncertainty is often criticized, our theory and results suggest that increased financial reporting quality can be an unanticipated benefit of the uncertainty that naturally arises from a measured and deliberative standard-setting process.

This paper was accepted by Ranjani Krishnan, accounting.

Funding: Research funding was provided by The University of Arizona, The University of Texas at Austin, and Cornell University.

Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2023.01469.