We examine how severity of financial constraints influences a firm's choice of accounting policy. This paper shows that firms with mild financial constraints choose an aggressive accounting policy and those with severe financial constraints choose a conservative accounting policy

We examine how severity of financial constraints influences firms' choices of accounting policies. This paper shows that firms with mild financial constraints choose an aggressive accounting policy and those with severe financial constraints choose a conservative accounting policy.

This paper treats risky investment projects under adverse selection and considers optimal penalties for erroneous auditing reports that maximize social welfare. These penalties give firms an incentive to choose accounting policies that maximize social welfare. We characterize the optimal...