The Economics of Accounting

223 Pages Posted: 6 May 2018 Last revised: 28 Mar 2022

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: March 25, 2022

Abstract

Our objective is to spell out financial accounting’s economic roles. This book has 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 fineness of information produced or its properties. Readers can view this part 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, combined with self-interested behavior, influences properties of accounting information produced and affects how it is used in valuation, contracting, and firms’ investment decisions. Our thesis is that earnings and other financial-accounting outputs help firms function more efficiently. Shareholder value is our primary efficiency measure, and we also 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, The Economics of Accounting (March 25, 2022). 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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