This paper uses an accounting rule change and the U.S. insurance industry to empirically show that the way in which accounting information is presented can distort equilibrium economic outcomes. When firms’ summary performance measure includes changes in unrealized gains and losses (UGL) from financial asset holdings, investor inattention causes the firms’ stock returns to overreact to changes in UGL. Inattentive investors perceive the firms’ earnings as having higher residual uncertainty and demand larger discounts on the firms’ stock prices. To maximize compensation, managers cut financial asset holdings. Managerial myopia exacerbates the response. A simple model formalizes the mechanism.

Uniformity is an essential feature of financial reporting, yet its desirability has long been debated. We study a model in which firms decide whether to adopt either their locally preferred accounting methods or a common method, followed by an investor allocating capital across firms. Firms’ choices of a common method are strategic complements in attaining more comparable reports. As a result, multiple equilibria may exist. Specifically, an equilibrium in which firms use their local methods always exists. However, an equilibrium in which firms adopt a common method exists if uniformity improves comparability significantly and firm-specific productivity shocks are large relative to the common productivity shock. Firms may fail to coordinate on adopting the Pareto-dominant accounting method, which may not even emerge as an equilibrium if investments exhibit substitutability. These coordination problems provide accounting regulation an opportunity to facilitate efficient capital allocation, thus providing a microfoundation for accounting measurement regulation.

Liquidity transformation, a key role of banks, is thought to increase fragility, as uninsured depositors face an incentive to withdraw money before others (a so‐called panic run). Despite much theoretical work, however, there is little empirical evidence establishing this mechanism. In this paper, we provide the first large‐scale evidence of this mechanism. Banks that engage in more liquidity transformation exhibit higher fragility, as captured by stronger sensitivities of uninsured deposit flows to bank performance and greater levels of uninsured deposit outflows when performance is poor. We also explore the effects of deposit insurance and systemic risk.