Explaining Rules-Based Characteristics in U.S. GAAP: Theories and Evidence

Posted: 26 Apr 2017

See all articles by Dain C. Donelson

Dain C. Donelson

University of Iowa

John M. McInnis

University of Texas at Austin - Department of Accounting

Richard Mergenthaler

Penn State University

Multiple version iconThere are 2 versions of this paper

Date Written: June 1, 2016

Abstract

Despite debate on the desirability of rules-based standards, no studies provide evidence on why accounting standards take on rules-based characteristics. We identify and test five theories from prior research (litigation risk, constraining opportunism, complexity, transaction frequency, and age) that could explain why some U.S. accounting standards contain rules-based characteristics. Litigation risk and complexity are most consistently related to cross-sectional and time-series variation in rules-based characteristics. We find more limited evidence that frequent transactions, age, and desires by regulators to constrain opportunistic reporting are related to rules-based standards. We note, however, that our findings are necessarily descriptive because standards arise endogenously from market and political forces, limiting causal interpretation. Further, it is difficult to perfectly separate rules-based characteristics of the standard from both the complexity of the standard and the characteristics of the underlying transaction, including the complexity of the transaction.

Keywords: Rules-Based Accounting Standards, Standard Setting, Litigation, Transaction Complexity

JEL Classification: M40, M41, M48, K20, K22

Suggested Citation

Donelson, Dain C. and McInnis, John M. and Mergenthaler, Richard Dean, Explaining Rules-Based Characteristics in U.S. GAAP: Theories and Evidence (June 1, 2016). Journal of Accounting Research, Volume 54, Issue 3, Pages 827–861, June 2016, Available at SSRN: https://ssrn.com/abstract=2958272

Dain C. Donelson

University of Iowa ( email )

108 Pappajohn Business Building
Iowa City, 52242-1000
United States

John M. McInnis

University of Texas at Austin - Department of Accounting ( email )

Austin, TX 78712
United States
512-232-6791 (Phone)

Richard Dean Mergenthaler (Contact Author)

Penn State University ( email )

University Park, PA 16802-3306
United States

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