The Economics of Accounting

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.