Measurement Matters: Financial Reporting and Productivity

We examine the relation between financial measurement practices and firm-level productivity. Using two proprietary data sets, including a comprehensive panel of firm tax returns, we find that financial measurement quality explains 10-20% of the intra-industry dispersion of total factor productivity (TFP), a magnitude similar to that of other structured management practices identified in prior studies. We provide evidence of two mechanisms for this result. First, cross-sectional and panel analyses are consistent with high-quality measurement as a management practice causing higher productivity. Second, using plausibly exogenous differences in misreporting incentives, we show that external auditors attenuate reporting biases in administrative data. Thus we show that a portion of measured productivity heterogeneity is the direct result of reporting differences across _rms. While short of identifying causal treatment effects, the economic magnitude of our results suggests that _rms' accounting practices are an important area for explaining the vast heterogeneity in reported productivity.