This paper examines how accounting comparability affects the monitoring role and the risk allocation role of capital markets. We develop the statistical and informational properties of accounting reports under varying degrees of comparability. A perfectly comparable accounting information system enables investors to perfectly infer the difference between any two firms' future cash flows although investors remain uncertain about either firm's cash flow. Comparability alleviates entrepreneurs' moral hazard problem by strengthening the price response to the relative accounting performance, but can induce excessive price risk as well as residual systematic cash flow risk. Unlike the investors (users) who earn their surplus by bearing the residual systematic risk, the entrepreneurs (preparers) do not find perfect comparability desirable. Hence, a standard setter would mandate higher comparability than preferred by preparers, but not perfect comparability.

This paper examines the role of conservatism when an agent can manipulate upcoming earnings before all uncertainty is resolved. An increase in conservatism, by reducing the likelihood of favorable earnings, requires steeper performance pay to maintain the same level of incentives, which in turn increases the equilibrium earnings manipulation. Trade‐offs between inducing effort and curbing manipulation predict an interior level of conservatism as optimal. The optimal level of conservatism is positively associated with enforcement, economic profitability and earnings quality, and negatively associated with agency frictions. In particular, we show that more economically profitable firms choose to be more conservative. We also establish that the association between performance pay and manipulation identifies whether conservatism is optimally chosen or exogenously imposed. In an application to debt contracting, we show that optimal conservatism is negatively associated with borrowers’ bargaining power.

We study the effects of disclosure in a dynamic market with imperfect competition. The supply of an asset is determined by a large shareholder with price impact, who trades slowly to diversify away from concentrated ownership. Small investors provide capital and thus risk-bearing capacity to the market. Although it is well known that disclosure impedes risk sharing by shifting risk before future trading opportunities, we show that disclosure, at the same time, can enhance risk sharing by promoting more trades. Resolving this tradeoff, an interior level of disclosure quality maximizes the small investors’ surplus as well as the total surplus, but minimizes the large shareholder’s surplus. Further, efficient disclosure policies feature increasing quality over time.

We study the effect of subsequent write-off tests on myopic managers’ investment decisions. Write-off tests discipline overinvestment when the likelihood of adverse events is high but can otherwise cause more severe underinvestment. Hence, tightening impairment stringency improves firm value when the likelihood of adverse events is high but destroys firm value when that likelihood is low. With intermediate levels of likelihood, firm value is hump-shaped in impairment stringency. To test the theory, we exploit an increase in goodwill impairment stringency following goodwill-related restatements by peer firms audited by the same auditor office, and we adopt a stacked difference-in-differences (DiD) design to control for any generic effects of peer restatements. Firms facing more stringent goodwill impairment reduce M&As relative to other types of investment, as well as in absolute amounts. The valuation of treated firms improves only during periods of high recession expectations or when facing high distress risk. Data Availability: Data are available from sources identified in the text.