Stability and Regime Change: The Evolution of Accounting Standards

44 Pages Posted: 31 Oct 2017 Last revised: 4 Sep 2019

See all articles by Hui Chen

Hui Chen

University of Zurich

Li Yang

Columbia University

Date Written: September 1, 2019


We regard accounting regulation as a politico-economic institution and analyze its evolution in the presence of changing investor sentiment. When the market sentiment is moderate, if most of the business projects in the economy are successful, the economy will enter a stable high-disclosure regime. If most of the projects are unsuccessful, the economy may enter a stable low-disclosure regime or experience a regime change from low to high disclosure. The regime change can take place if the economy coordinates on a future high disclosure quality, which will induce a Pareto improvement and is thus supported by all interest groups in the economy. In contrast, when the market sentiment is extremely hyped up, low disclosure regime will always emerge. While an initial majority of unsuccessful projects will lead the economy into a stable low-disclosure regime, an initial majority of successful projects will also result in a low disclosure regime. This regime change from high to low disclosure occurs because even successful projects benefit from low disclosure due to the significant price boost. These results are generally consistent with the observed development of accounting regulation.

Keywords: accounting standards, political economy, dynamic voting

JEL Classification: D72, K22, M41, M48

Suggested Citation

Chen, Hui and Yang, Li, Stability and Regime Change: The Evolution of Accounting Standards (September 1, 2019). Available at SSRN: or

Hui Chen (Contact Author)

University of Zurich ( email )

Plattenstrasse 14
Zurich, CH-8032

Li Yang

Columbia University ( email )

3022 Broadway
New York, NY 10027
United States

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