Capital Structure Decisions and Accounting Policy Selection Relationships

Abstract

This research investigates the underexplored bidirectional causality between capital
structure decisions and accounting policy selection, moving beyond the traditional unidirectional frameworks that dominate corporate finance literature. We propose a novel
methodological approach by integrating agent-based modeling with historical corporate
data analysis to simulate how firms simultaneously optimize financing strategies and
accounting choices under conditions of market uncertainty and regulatory constraints.
Our model treats accounting policy not merely as a reporting outcome but as a strategic variable that actively shapes and is shaped by leverage targets, debt covenants, and
equity market perceptions. The study formulates three unconventional research questions: (1) How do firms dynamically co-adapt capital structure and accounting policies
in response to evolving market conditions? (2) What strategic equilibria emerge when
accounting flexibility is explicitly modeled as a component of financial strategy? (3)
How do information asymmetries between managers and capital providers create feedback loops between reporting choices and financing decisions? We develop a multi-agent
simulation framework where heterogeneous firms interact within a simulated capital
market, making simultaneous decisions about debt-equity mixes and accounting policy
selections from permissible alternatives. The model incorporates learning mechanisms
where firms adjust strategies based on observed outcomes of peer entities. Our analysis of simulated data reveals several counterintuitive findings: firms often converge
toward suboptimal capital structures when accounting policy selection is treated as
exogenous rather than endogenous; moderate accounting conservatism correlates with
more stable leverage ratios during market downturns; and strategic complementarities
exist between certain accounting methods and specific financing instruments that are
overlooked in conventional models. The results demonstrate that treating accounting policy as an integrated component of capital structure strategy leads to different
normative prescriptions than traditional sequential models. This research contributes
original insights by reframing the relationship between financing and reporting decisions as a simultaneous optimization problem, offering a more holistic understanding of
corporate financial strategy formulation. The findings have implications for financial
regulation, corporate governance, and the design of managerial incentive systems that
recognize the interconnected nature of these fundamental business decisions.