On the Social Value of Accounting Objectivity in Bank Stability

In this paper, we analyze the social value of accounting objectivity in maintaining bank stability. Building on an early, in‡uential accounting work by Ijiri and Jaedicke (1966), we operationalize two informational properties, objectivity and accuracy, in a correlated information structure and embedded them into a model of bank runs. We show that, when compared with the accuracy property, the objectivity property exhibits a comparative advantage in mitigating ine¢ cient panic-based bank runs. In fact, it is possible that improving objectivity discourages while improving accuracy encourages such runs. Our model also sheds light on the design of optimal accounting rules to enhance objectivity. We …nd that, in order to generate a more objective accounting report, the accounting rule should be made less admissible to evidence that is subject to managerial intervention.