Knowledge Transfer Costs and Dependence as Determinants of Financial Reporting

20 Pages Posted: 15 Dec 2003

See all articles by David Hay

David Hay

University of Auckland - Business School

Abstract

This paper examines the circumstances in which financial reporting exists. Jensen and Meckling (1995) observe that where there are high knowledge transfer costs, then decentralisation is necessary; and that where decentralisation occurs there is a control problem, which can be addressed by providing a control system. I predict that where there are high knowledge transfer costs there will be a control system; if the control system uses financial reports, these will occur for activities with high knowledge transfer costs. The ability to decentralise is reduced where dependence makes it potentially costly to allow a subordinate to make decisions about the activity. The paper predicts that high dependence will be negatively associated with the existence of financial reports. The results confirm the predictions that financial reports are positively associated with knowledge transfer costs and negatively associated with dependence.

JEL Classification: M40, M46

Suggested Citation

Hay, David, Knowledge Transfer Costs and Dependence as Determinants of Financial Reporting. Available at SSRN: https://ssrn.com/abstract=479122

David Hay (Contact Author)

University of Auckland - Business School ( email )

12 Grafton Rd
Auckland, 1010
New Zealand

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