Measurement matters: financial reporting and productivity
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Citation (published version)Petro Lisowsky, John Barrios, Michael Minnis. "Measurement Matters: Financial Reporting and Productivity."
We examine the relation between financial measurement practices and firm-level productivity. Using two proprietary data sets, including a comprehensive panel of firm tax returns, we find that financial measurement quality explains 10-20% of the intra-industry dispersion of total factor productivity (TFP), a magnitude similar to that of other structured management practices identified in prior studies. We provide evidence of two mechanisms for this result. First, cross-sectional and panel analyses are consistent with high-quality measurement as a management practice causing higher productivity. Second, using plausibly exogenous differences in misreporting incentives, we show that external auditors attenuate reporting biases in administrative data. Thus we show that a portion of measured productivity heterogeneity is the direct result of reporting differences across firms. While short of identifying causal treatment effects, the economic magnitude of our results suggests that firms’ accounting practices are an important area for explaining the vast heterogeneity in reported productivity.
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