Economics of Accounting Earnings

220 Pages Posted: 6 May 2018 Last revised: 15 Sep 2021

See all articles by Richard M. Frankel

Richard M. Frankel

Washington University in Saint Louis - Olin Business School

S.P. Kothari

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Luo Zuo

Cornell University - Samuel Curtis Johnson Graduate School of Management

Date Written: September 14, 2021

Abstract

The objective of this book is to present an economic analysis of accounting earnings to aid our understanding of financial accounting’s economic roles. We structure the book into two parts. The first part examines the attributes of accounting earnings as produced and received in the market without delving into the preparers’ incentives influencing the amount of information production or the effect of the incentives on its properties. This part can be viewed as a static or reduced-form analysis of accounting earnings and its relation to security prices. The second part presents a dynamic and strategic analysis of accounting earnings. It recognizes that accounting information affects users’ and producers’ decisions, which, against the backdrop of self-interested behavior, influences properties of accounting information produced and affects how it is used in valuation, in contracting, and in firms’ investment decisions. Our thesis is that earnings and other outputs of financial accounting help firms function more efficiently. We often use shareholder value as the measure of efficiency, though we discuss regulation, social and contract efficiency.

Keywords: Financial accounting, imperfect and incomplete markets, information asymmetry, incentive conflicts, shareholder value, earnings-return relation, market efficiency.

JEL Classification: D82, D86, G10, G12, G14, G30, K22, L21, M41, M42.

Suggested Citation

Frankel, Richard M. and Kothari, S.P. and Zuo, Luo, Economics of Accounting Earnings (September 14, 2021). Available at SSRN: https://ssrn.com/abstract=3165085 or http://dx.doi.org/10.2139/ssrn.3165085

Richard M. Frankel

Washington University in Saint Louis - Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

S.P. Kothari (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

E52-325
Cambridge, MA 02142
United States
617-253-0994 (Phone)
617-253-0603 (Fax)

Luo Zuo

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

349 Sage Hall
Ithaca, NY 14853
United States
607-255-4002 (Phone)

HOME PAGE: http://www.johnson.cornell.edu/faculty-research/faculty/lz352/

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