The Economic Consequences and Underlying Mechanisms of Implementing Common Accounting Standards

We empirically examine the channels through which the implementation of common accounting standards affects liquidity. Theory suggests two channels through which adopting a common standard can affect liquidity: the precision channel and the network channel. The overall effect on liquidity depends on the net effect of those two channels and is ultimately an empirical question. We use the adoption of the new revenue standard (ASC 606) to test the analytical framework and find that, overall, there is an increase in liquidity associated with ASC 606. Consistent with theory, we find that the increase in liquidity is the highest for firms that experience an increase in both precision (corresponding to the precision channel) and the number of informed traders (corresponding to the network channel). In contrast, firms that experience an increase in neither do not experience an increase in liquidity, despite an increase in disclosure.

Duke Scholars

Author Xu Jiang Fuqua School of Business