Standard Setting: Political Issues

Standard Setting: Political Issues

1. Distribution of the Benefits of Information and Regulation FD

   • it is difficult because it involves value judgments of fairness among affected parties
     • individual utilities cannot in general be aggregated into a social preference ordering
     • Pareto optimality as a criterion used
   • Regulation Fair Disclosure
     • SEC's regulation in attempt to improve the fairness of the distribution of information
     • several researches done to identify the impact of this reg on abnormal return shares and adverse selection of the investors
     • it is consistent with the Public Interest Theory but the Interest Group Theory was also operatives

2. Criteria for Standard Setting

   • Decision Usefulness
   • Reduction of Information Asymmetry
   • Economic Consequences of New Standards
   • Consensus

3. Conflict and Compromise

   • the standards cannot be set in a vacuum
     • If important constituencies cannot obtain what they want, they will appeal to the political process

4. The Regulator's Information Asymmetry

   • much of the information needed by the regulator, such as financial information, is in the hands of firm managers who are monopolistic producers of information about their firm
   • Regulator is unable to observe manager effort
   • Regulator faces
     • Moral Hazard
     • Adverse Selection
   • Laffont and Tirol Model: to illustrate how regulation theory may proceed under information asymmetry
     • If the standard setter follows the public interest theory, there will be some reduction in earnings quality to limit the manager’s ability to receive more compensation
     • to the extent that the accountant can reduce the amount of inside information, the problem of excess manager compensation is reduced
     • The optimal regulation is firm specific, since firm and manager characteristics differ.

5. International integration of capital markets

   • Convergence of accounting standards
     • Integration of capital markets makes them more efficient which attracts more investors
     • Benefit of IASB that can facilitate the process of standardizing accounting procedures
       • Reduce preparation cost
       • Lower cost of capital
       • Decrease network externalities
   • Effects of customs and institutions on financial reporting
     • BKR Study
       • Less information asymmetry in code law country
       • F/R will be less conservative in code law countri
     • BRW Study
       • Reduce agency cost of managerial and debt contracts
       • Reduce the need for timely and conservative reporting
   • Enforcement of accounting standards
     • Auditing is an important tool
   • Benefits of adopting high-quality acc standard
     • Reduced cost
     • increase the efficiency of the market
     • improves relationship between org.
     • leads to more investment from foreign sources