Accounting Standards, Regulatory Enforcement, and Innovation

48 Pages Posted: 10 Jan 2016 Last revised: 16 May 2017

See all articles by Volker Laux

Volker Laux

University of Texas at Austin - McCombs School of Business

Phillip C. Stocken

Dartmouth College - Tuck School of Business

Date Written: May 15, 2017

Abstract

We examine the effects of accounting standards and regulatory enforcement on entrepreneurial innovation and social welfare. When the entrepreneur issues a financial report that violates the standards, a regulatory agency may detect the violation and bring charges. We find that when regulatory penalties are relatively insensitive to the magnitude of the violation, optimal standards are sufficiently low that they induce full compliance, and increase as the intensity of enforcement increases. In contrast, when regulatory penalties are sensitive to the magnitude of the violation, optimal standards induce non-compliance and decline as the intensity of enforcement increases.

Keywords: Accounting Standards, Regulatory Enforcement, Innovation, Manipulation

Suggested Citation

Laux, Volker and Stocken, Phillip C., Accounting Standards, Regulatory Enforcement, and Innovation (May 15, 2017). Available at SSRN: https://ssrn.com/abstract=2713170 or http://dx.doi.org/10.2139/ssrn.2713170

Volker Laux (Contact Author)

University of Texas at Austin - McCombs School of Business ( email )

2317 Speedway
Austin, TX 78712
United States

Phillip C. Stocken

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States
603-646-2843 (Phone)

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