RESEARCH HANDBOOK ON THE ECONOMICS OF CORPORATE LAW, Claire Hill & Brett McDonnell, eds., Edward Elgar, 2011-2012
20 Pages Posted: 4 Mar 2011
Date Written: March 3, 2011
Theory can have profound effects on practice, some intended and desirable, others unintended and undesirable. That's the story of the influence the field of law and economics has had on the domain of law and accounting. That influence comes primarily from agency theory and modern finance theory, specifically through the efficient capital market hypothesis and capital asset pricing model. Those theories have forged considerable change in federal securities regulation, accounting standard setting, state corporation law, and financial auditing. Affected areas include the nature of disclosure, the measure of financial concepts, the limits of shareholder protection, and the scope of auditor duty.
Analysis reveals how agency theory and finance theory often but not always point to the same policy implications; it reveals how finance theory’s assumptions and limitations are often but not always respected in policy development. As a result, while these theories sometimes produced policy changes that were both intended and desirable, some policy changes were both unintended and undesirable while others were intended but undesirable. Examination stresses the power of ideas and how they are used and cautions creators and users of ideas to take care to appreciate the limits of theory when shaping practice. That's vital since the effects of law and economics on law and accounting remain debated in many contexts.
Keywords: Finance Theory, Agency Theory, Limits of Theory, Forward Looking Disclosure, Pro Forma Reporting, Cash Flow Statement, Fair Value Accounting, Appraisal Proceedings, Stock Market Exception, Auditing, Fair Presentation, Reputation, Incentives, Legal Education, Corporate Finance, Law and Accounting
JEL Classification: B00, B1, G1, G2, G3, G30, G34, K1, K2, K4, K12, K19, K20, K22, M4, N00
Suggested Citation: Suggested Citation
Cunningham, Lawrence A., The Influence of Law and Economics on Law and Accounting: Two Steps Forward, One Step Back (March 3, 2011). RESEARCH HANDBOOK ON THE ECONOMICS OF CORPORATE LAW, Claire Hill & Brett McDonnell, eds., Edward Elgar, 2011-2012; GWU Legal Studies Research Paper No. 531; GWU Law School Public Law Research Paper No. 531. Available at SSRN: https://ssrn.com/abstract=1776106
By Ray Ball