IDEAS home Printed from https://ideas.repec.org/a/eee/jaecon/v65y2018i2p221-236.html
   My bibliography  Save this article

Accounting standards, regulatory enforcement, and innovation

Author

Listed:
  • Laux, Volker
  • Stocken, Phillip C.

Abstract

We examine the effects of accounting standards and regulatory enforcement on entrepreneurial innovation and social welfare. When the entrepreneur issues a financial report that violates the accounting standards, a regulatory agency may detect the violation and bring charges. We find that when regulatory penalties are relatively insensitive to the magnitude of the violation, optimal standards are sufficiently low that they induce full compliance, and increase as the intensity of enforcement increases. In contrast, when regulatory penalties are sensitive to the magnitude of the violation, optimal standards induce non-compliance and decline as the intensity of enforcement increases.

Suggested Citation

  • Laux, Volker & Stocken, Phillip C., 2018. "Accounting standards, regulatory enforcement, and innovation," Journal of Accounting and Economics, Elsevier, vol. 65(2), pages 221-236.
    • Handle: RePEc:eee:jaecon:v:65:y:2018:i:2:p:221-236
    DOI: 10.1016/j.jacceco.2017.11.001
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0165410117300691
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jacceco.2017.11.001?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Barth, Mary E. & Israeli, Doron, 2013. "Disentangling mandatory IFRS reporting and changes in enforcement," Journal of Accounting and Economics, Elsevier, vol. 56(2), pages 178-188.
    2. Polinsky, A. Mitchell & Shavell, Steven, 2014. "Costly litigation and optimal damages," International Review of Law and Economics, Elsevier, vol. 37(C), pages 86-89.
    3. Karpoff, Jonathan M. & Lee, D. Scott & Martin, Gerald S., 2008. "The Cost to Firms of Cooking the Books," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 43(3), pages 581-611, September.
    4. Dharmapala, Dhammika & Khanna, Vikramaditya, 2016. "The Costs and Benefits of Mandatory Securities Regulation: Evidence from Market Reactions to the JOBS Act of 2012," Journal of Law, Finance, and Accounting, now publishers, vol. 1(1), pages 139-186, April.
    5. Laux, Volker & Stocken, Phillip C., 2012. "Managerial reporting, overoptimism, and litigation risk," Journal of Accounting and Economics, Elsevier, vol. 53(3), pages 577-591.
    6. Qi Chen & Brian Mittendorf & Yun Zhang, 2010. "Endogenous Accounting Bias when Decision Making and Control Interact," Contemporary Accounting Research, John Wiley & Sons, vol. 27(4), pages 1063-1091, December.
    7. Joni Hersch & W. Kip Viscusi, 2007. "Tort Liability Litigation Costs for Commercial Claims," American Law and Economics Review, American Law and Economics Association, vol. 9(2), pages 330-369.
    8. Burgstahler, David & Dichev, Ilia, 1997. "Earnings management to avoid earnings decreases and losses," Journal of Accounting and Economics, Elsevier, vol. 24(1), pages 99-126, December.
    9. Jonathan M. Karpoff & D. Scott Lee & Gerald S. Martin, 2014. "The Consequences to Managers for Financial Misrepresentation," Springer Books, in: Roberto Pietra & Stuart McLeay & Joshua Ronen (ed.), Accounting and Regulation, edition 127, chapter 0, pages 339-375, Springer.
    10. Christensen, Hans B. & Hail, Luzi & Leuz, Christian, 2013. "Mandatory IFRS reporting and changes in enforcement," Journal of Accounting and Economics, Elsevier, vol. 56(2), pages 147-177.
    11. Katz, Avery, 1988. "Judicial decisionmaking and litigation expenditure," International Review of Law and Economics, Elsevier, vol. 8(2), pages 127-143, December.
    12. Ronald A. Dye, 2002. "Classifications Manipulation and Nash Accounting Standards," Journal of Accounting Research, Wiley Blackwell, vol. 40(4), pages 1125-1162, September.
    13. Louis Kaplow, 2011. "On the Optimal Burden of Proof," Journal of Political Economy, University of Chicago Press, vol. 119(6), pages 1104-1140.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Kristian D. Allee & Brian J. Bushee & Tyler J. Kleppe & Andrew T. Pierce, 2022. "Did the Siebel Systems Case Limit the SEC's Ability to Enforce Regulation Fair Disclosure?," Journal of Accounting Research, Wiley Blackwell, vol. 60(4), pages 1235-1291, September.
    2. Gao, Pingyang & Jiang, Xu, 2020. "The economic consequences of discrete recognition and continuous measurement," Journal of Accounting and Economics, Elsevier, vol. 69(1).
    3. Christopher Bleibtreu & Roland Königsgruber & Thomas Lanzi, 2022. "Financial reporting and corporate political connections: An analytical model of interactions," Post-Print hal-03957978, HAL.
    4. Biehl, Henrike & Bleibtreu, Christopher & Stefani, Ulrike, 2024. "The real effects of financial reporting: Evidence and suggestions for future research," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 54(C).
    5. Schantl, Stefan F. & Wagenhofer, Alfred, 2020. "Deterrence of financial misreporting when public and private enforcement strategically interact," Journal of Accounting and Economics, Elsevier, vol. 70(1).
    6. Giau Bui, Dien & Chen, Yehning & Lin, Chih-Yung & Lin, Tse-Chun, 2021. "Risk-taking of bank CEOs and corporate innovation," Journal of International Money and Finance, Elsevier, vol. 115(C).
    7. Chen, Xihui Haviour & Tee, Kienpin & Chang, Victor, 2022. "Accelerating Innovation Efficiency through Agile Leadership: The CEO Network Effects in China," Technological Forecasting and Social Change, Elsevier, vol. 179(C).
    8. Ralf Ewert & Alfred Wagenhofer, 2019. "Effects of Increasing Enforcement on Financial Reporting Quality and Audit Quality," Journal of Accounting Research, Wiley Blackwell, vol. 57(1), pages 121-168, March.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Schantl, Stefan F. & Wagenhofer, Alfred, 2020. "Deterrence of financial misreporting when public and private enforcement strategically interact," Journal of Accounting and Economics, Elsevier, vol. 70(1).
    2. Farmer Amy & Pecorino Paul, 2016. "Litigation with a Variable Cost of Trial," Review of Law & Economics, De Gruyter, vol. 12(2), pages 203-226, July.
    3. Ormazabal, Gaizka, 2018. "The Role of Stakeholders in Corporate Governance: A View from Accounting Research," CEPR Discussion Papers 12775, C.E.P.R. Discussion Papers.
    4. Yim, Andrew, 2013. "Mixture and Continuous 'Discontinuity' Hypotheses: An Earnings Management Model with Auditor-Required Adjustment," MPRA Paper 44702, University Library of Munich, Germany.
    5. Chen, Yangyang & Fan, Qingliang & Yang, Xin & Zolotoy, Leon, 2021. "CEO early-life disaster experience and stock price crash risk," Journal of Corporate Finance, Elsevier, vol. 68(C).
    6. Ormazabal, Gaizka & Duro, Miguel & Heese, Jonas, 2017. "Does the Public Disclosure of the SEC’s Oversight Actions Matter?," CEPR Discussion Papers 12145, C.E.P.R. Discussion Papers.
    7. Dechow, Patricia & Ge, Weili & Schrand, Catherine, 2010. "Understanding earnings quality: A review of the proxies, their determinants and their consequences," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 344-401, December.
    8. Ed Dehaan & Frank Hodge & Terry Shevlin, 2013. "Does Voluntary Adoption of a Clawback Provision Improve Financial Reporting Quality?," Contemporary Accounting Research, John Wiley & Sons, vol. 30(3), pages 1027-1062, September.
    9. Gibson, Rajna & Sohn, Matthias & Tanner, Carmen & Wagner, Alexander F., 2021. "Earnings Management and Managerial Honesty: The Investors' Perspectives," LawFin Working Paper Series 7, Goethe University, Center for Advanced Studies on the Foundations of Law and Finance (LawFin).
    10. Polinsky, A. Mitchell & Shavell, Steven, 2014. "Costly litigation and optimal damages," International Review of Law and Economics, Elsevier, vol. 37(C), pages 86-89.
    11. Cumming, Douglas & Dannhauser, Robert & Johan, Sofia, 2015. "Financial market misconduct and agency conflicts: A synthesis and future directions," Journal of Corporate Finance, Elsevier, vol. 34(C), pages 150-168.
    12. Dhammika Dharmapala, 2016. "Estimating the Compliance Costs of Securities Regulation: A Bunching Analysis of Sarbanes-Oxley Section 404(b)," CESifo Working Paper Series 6180, CESifo.
    13. Badolato, Patrick G. & Donelson, Dain C. & Ege, Matthew, 2014. "Audit committee financial expertise and earnings management: The role of status," Journal of Accounting and Economics, Elsevier, vol. 58(2), pages 208-230.
    14. Arena, Matteo P. & Ferris, Stephen P., 2018. "A global analysis of corporate litigation risk and costs," International Review of Law and Economics, Elsevier, vol. 56(C), pages 28-41.
    15. Li, Keming, 2024. "Informed trading prior to financial misconduct: Evidence from option markets," Journal of Financial Markets, Elsevier, vol. 67(C).
    16. Merz, Alexander, 2017. "What have we learned from SFAS 123r and IFRS 2? A review of existing evidence and future research suggestions," Journal of Accounting Literature, Elsevier, vol. 38(C), pages 14-33.
    17. Gaganis, Chrysovalantis & Hasan, Iftekhar & Pasiouras, Fotios, 2016. "Regulations, institutions and income smoothing by managing technical reserves: International evidence from the insurance industry," Omega, Elsevier, vol. 59(PA), pages 113-129.
    18. Trimble, Madeline, 2018. "A reinvestigation into accounting quality following global IFRS adoption: Evidence via earnings distributions," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 33(C), pages 18-39.
    19. Colleen Honigsberg, 2019. "Hedge Fund Regulation and Fund Governance: Evidence on the Effects of Mandatory Disclosure Rules," Journal of Accounting Research, Wiley Blackwell, vol. 57(4), pages 845-888, September.
    20. David Abad & M. Fuensanta Cutillas†Gomariz & Juan Pedro Sánchez†Ballesta & José Yagüe, 2018. "Does IFRS Mandatory Adoption Affect Information Asymmetry in the Stock Market?," Australian Accounting Review, CPA Australia, vol. 28(1), pages 61-78, March.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jaecon:v:65:y:2018:i:2:p:221-236. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jae .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.