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| Author: | Dye, R.A. Sridhar, S.S. |
| Title: | A positive theory of flexibility in accounting standards |
| Journal: | Journal of Accounting & Economics
2008 : DEC, VOL. 46:2-3, p. 312-333 |
| Index terms: | accounting standards network externalities reporting bias securities |
| Language: | eng |
| Abstract: | This paper developes a positive theory of accounting standards when standards generate network externatilities and differ in the amount of reporting discretion, or flexibility, they provide firms. The study evaluates expected value-maximizing firms' preferences between two standards regimes, rigid and flexible, as the number of firms subject to each standard varies, and as the mapping from the underlying economics of the firms' transactions to the accounting reports produced under the two standards vary. Firms' preferences between the two regimes are also compared to the preferences of profit-maximizing traders in the firms' securities. The central results reveal, among others, that expected value-making firms will choose rigid standards over flexible standards when transactions are relatively homogenous or when there is substantial variation in how transactions are reported under flexible standards for reasons that are unrelated to the economic value of transactions. |
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