A positive theory of flexibility in accounting standards

Ronald A. Dye, Sri S. Sridhar*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

23 Scopus citations

Abstract

We develop a positive theory of accounting standards when standards generate network externalities and differ in the amount of reporting discretion, or flexibility, they provide firms. We evaluate expected value-maximizing firms' preferences between two standards regimes, rigid and flexible, as the number of firms subject to each standard varies, as the organization of the securities market varies, and as the mapping from the underlying economics of the firms' transactions to the accounting reports produced under the two standards vary. We also compare firms' preferences between the two regimes to the preferences of profit-maximizing traders in the firms' securities.

Original languageEnglish (US)
Pages (from-to)312-333
Number of pages22
JournalJournal of Accounting and Economics
Volume46
Issue number2-3
DOIs
StatePublished - Dec 1 2008

Keywords

  • Accounting standards
  • Investment efficiencies
  • Network externalities
  • Reporting biases
  • Reporting discretion

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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