The remarks in this paper consist of two parts. The first part concerns the linkages established ... more The remarks in this paper consist of two parts. The first part concerns the linkages established in the three excellent papers among accounting, corporate governance, and market discipline. The second part discusses the possible uses and abuses of market ...
The Double Auction Market Institutions, Theories, and Evidence
Dhananjay K. Gode and Shyam Sunder Graduate School of Industrial Administration, Camegie-Melion U... more Dhananjay K. Gode and Shyam Sunder Graduate School of Industrial Administration, Camegie-Melion University, Schenley Park, Pittsburgh PA 15213 SEVEN Lower Bounds for Efficiency of Surplus Extraction in Double Auctions The double auction is a robust institution for ...
Thank you for inviting comments on the proposed rule on roadmap for the use of IFRS by U.S. issue... more Thank you for inviting comments on the proposed rule on roadmap for the use of IFRS by U.S. issuers. My comments are enclosed, along with two papers that give detailed analysis as the basis of these comments.
Attempts to improve financial reporting by adding clarity to its rules and standards through issu... more Attempts to improve financial reporting by adding clarity to its rules and standards through issuance of interpretations and guidance also serve to furnish a better roadmap for evasion through financial engineering. Thus, paradoxically, regulation of financial reporting becomes a victim of its own pursuit of clarity. The interplay between rules written to govern preparation and auditing of financial reports on one hand, and financial engineering of securities to manage the appearance of financial reports on the other, played a significant role in the financial crisis of the recent years. Fundamental rethinking about excessive dependence of financial reporting on written rules (to the exclusion of general acceptance and social norms) may be necessary to preserve the integrity of financial reporting in its losing struggle with financial engineering.
Closed exchange and production-and-exchange economies may have multiple equilibria, a fact that i... more Closed exchange and production-and-exchange economies may have multiple equilibria, a fact that is usually ignored in macroeconomic models. Our basic argument is that default and bankruptcy laws are required to prevent strategic default, and these laws can also serve to provide the conditions for uniqueness. In this paper we report experimental evidence on the effectiveness of this approach to resolving multiplicity: society can assign default penalties on fiat money so the economy selects one of the equilibria. Our data show that the choice of default penalty takes the economy close to the chosen equilibrium. The theory and evidence together reinforce the idea that accounting, bankruptcy and possibly other aspects of social mechanisms play an important role in resolving the otherwise mathematically intractable challenges associated with multiplicity of equilibria in closed economies. Additionally we discuss the politico-economic meaning and experimental implications of default penalties that support an active bankruptcy-modified competitive equilibrium.
I am delighted to have this opportunity to comment on Jerry Feltham and Jinhan Pae's paper, "Anal... more I am delighted to have this opportunity to comment on Jerry Feltham and Jinhan Pae's paper, "Analysis of the Impact of Accounting Accruals on Earnings Uncertainty and Response Coefficients." Accruals constitute the heart of the system of accounting and financial reporting. It is accruals that distinguish accounting from mere counting of cash. Accrual accounting can be defined by the presence of liabilities and noncash assets on the balance sheet. Without accruals, there would be no liabilities and no assets except cash. Accruals require accountants to anticipate the future, and make difficult judgments about events that are uncertain and yet to occur. A greater part of accountants' professionalism consists of making these judgments. Many people who thought that accountants might be replaced by computers are surprised that 40 years later, no such substitution is in sight. While a large part of bookkeeping can be, and has already been, taken over by computers, determination of accruals has not, and cannot be, taken over by computers. In this sense, accruals are the essence of accounting. Which anticipations about the future should be included in the books of account and financial reports, and which ones should be deferred until a later date? Which ones are, in fact, included, and with what frequency? What are the consequences of different answers to these questions for the relationship between financial reports and security prices? These are critical issues that have been before managers, accountants, security analysts, and regulators for at least the past hundred years since the joint stock companies and stock and bond markets became an important part of the U.S. economy. With the explosion of derivative securities in the recent decades, triggered by the cheaper transaction technologies, these questions about accruals have become both more difficult as well as more important. I therefore look forward to research that promises new insights into the nature and consequences of accruals. For this reason, and knowing Professor Feltham's seminal contributions to accounting in the past, I accepted Professor Callen's invitation to discuss this paper with alacrity. 1 admit to being disappointed on the basis of what I have been able to understand of the paper. The paper opens with a reference to Feltham and Ohlson's 1996
This study considers accounting in the new information economy. The basic framework of accounting... more This study considers accounting in the new information economy. The basic framework of accounting for firms reflects a set of contracts and it helps define, implement and enforce these contracts. This framework is stable, and unlikely to change soon. However, the new information technology has been transforming the markets in which firms operate, and opening up new markets. We use a taxonomy identified with Hatfield (1924) and based on markets for managerial talent, investment capital and products. It helps develop a perspective on the changes in organizations and accounting systems. Five aspects of accounting in the new economy are considered. Technology; Information and Efficiency; New Organization design for web commerce; New cost structures and management; and Experimentation with the market for standards. JEL Classification: M41
Attainment of rational expectations equilibria in asset markets calls for the price system to dis... more Attainment of rational expectations equilibria in asset markets calls for the price system to disseminate agents' private information to others. Markets populated by human agents are known to be capable of converging to rational expectations equilibria. This paper reports comparable market outcomes when human agents are replaced by boundedly-rational algorithmic agents who use a simple means-end heuristic. These algorithmic agents lack the capability to optimize; yet outcomes of markets populated by them converge near the equilibrium derived from optimization assumptions. These findings point to market structure (rather than cognition or optimization) being an important determinant of efficient aggregate level outcomes.
In summary, Pareto would have the Ministry of Production choose a s = a * s , compensate those wh... more In summary, Pareto would have the Ministry of Production choose a s = a * s , compensate those who would otherwise be harmed by the choice and later consider how the residual might best be distributed. Kemp and Pezanis-Christou (1999) Economic theorists traditionally banish discussions of information to footnotes. Serious consideration of costs of communication, imperfect knowledge, and the like would, it is believed, complicate without informing. This paper, which analyses competitive markets in which the characteristics of the commodities exchanged are not fully known to at least one of the parties to the transaction, suggests that this comforting myth is false. Some of the most important conclusions of economic theory are not robust to considerations of imperfect information. Rothschild and Stiglitz (1976, p. 629) Agreement on the virtues of free trade as a means to advance the economic welfare of society is a well-known exception to economists' disagreements with one another on other matters of policy. Politicians, and the population at large, seem united in their opposition to free trade in most lands and times. Economists attribute the attitude of politicians to a lack of vision, wisdom, and leadership, while politicians dismiss the free trade arguments as simply academic-a euphemism for irrelevant. In spite of much debate, the arguments have changed little in the two centuries since Torrens and Ricardo proposed the theory of comparative advantage. In this paper we propose to perturb this stasis by recognizing that serious economic obstacles exist in realizing the net gains from trade liberalization. Gains and losses of various agents and groups are unevenly distributed among them, and the information about their magnitude is inherently private. Such information is not truthfully
Design of contracts that define firms, and their accounting systems depends on the conditions in ... more Design of contracts that define firms, and their accounting systems depends on the conditions in the firm's factor and product markets. We examine the fundamental difficulty of defining and developing "uniform" accounting for diverse economic environments across countries and compare the differences in conditions prevailing in some key markets in Japan and the United States. There are important differences in industrial organization, accounting entities, markets for capital, managers, and labor, employee risk bearing, role of government, and market for corporate control. It would be difficult to defend the current reporting practices in either country to be optimal relative to the current or anticipated future market conditions. Instead of making premature commitment to a single set of worldwide standards, there may be value to allowing alternative sets of standards to compete in the marketplace.
Abstract We examine the effect of the incentives of the members of the board of directors on shar... more Abstract We examine the effect of the incentives of the members of the board of directors on shareholder wealth, CEO compensation and the sensitivity of this compensation to corporate performance in laboratory setting. Two methods of appointing the board, one by the CEO ...
By extending the logic of common agencies to international institutions, this paper shows the imp... more By extending the logic of common agencies to international institutions, this paper shows the importance of studying the transfer process among groups within a country as well as among countries in trade negotiations. The consideration of difficulty or facility in transfers as well as the consideration of individual rationality constraint is essential for understanding the incentive mechanism in trade talks under an international organization. In this simple model of asymmetric information, we show that a transfer process uses up additional resources in order to realize the intended transfer. Costly transfers render the internal and international adjustment difficult, and they tend to deter the progress of trade liberalization.
Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch ge... more Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may be saved and copied for your personal and scholarly purposes. You are not to copy documents for public or commercial purposes, to exhibit the documents publicly, to make them publicly available on the internet, or to distribute or otherwise use the documents in public. If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence.
Certification of financial reports is tightly regulated with the intent to ensure the quality of ... more Certification of financial reports is tightly regulated with the intent to ensure the quality of this service. In order to place this market within a larger perspective, Part I of this paper presents archival data on certification activity in the economy. The finding of widespread availability of a diverse set of certifiers for most goods and services points to the competitive conditions that accounting firms may encounter as they attempt to expand their range of services. In Part II we examine an instance of audit firms unsuccessfully competing with non-traditional assurance providers of e-commerce privacy certification. Their failure appears to be attributable, at least in part, to the high cost of certification, inferior standards, and poor compliance by their clients. In Part III we document the types of certification reports issued by government agencies and private certification services. Private certification agencies issue more detailed and informative certification reports compared to government agencies. We discuss the implications of these findings for the market for audit services.
The accounting standardization project, kicked off by the passage of US securities laws in the 19... more The accounting standardization project, kicked off by the passage of US securities laws in the 1930s, has steadily gained momentum over seven decades. Today, written standards dominate accounting thought, practice, regulation, instruction, even research. Generally accepted accounting principles—originally a mere description in its plain English meaning—have since been capitalized into a proper name—Generally Accepted Accounting Principles—and the phrase now describes rules and regulations issued by authorities with power to inflict punishment on those who do not choose to accept them. How and why did financial reporting get caught in the standardization project, replacing social norms of corporate and professional behavior by written rules and standards? What are the consequences of this transformation? What alternative courses are available to accounting and corporate governance? I argue that heavy reliance on the codification of financial reporting has been a wrong path. A shift from rules towards norms of behavior may yet help accounting and corporate governance recover a better balance.
The remarks in this paper consist of two parts. The first part concerns the linkages established ... more The remarks in this paper consist of two parts. The first part concerns the linkages established in the three excellent papers among accounting, corporate governance, and market discipline. The second part discusses the possible uses and abuses of market ...
The Double Auction Market Institutions, Theories, and Evidence
Dhananjay K. Gode and Shyam Sunder Graduate School of Industrial Administration, Camegie-Melion U... more Dhananjay K. Gode and Shyam Sunder Graduate School of Industrial Administration, Camegie-Melion University, Schenley Park, Pittsburgh PA 15213 SEVEN Lower Bounds for Efficiency of Surplus Extraction in Double Auctions The double auction is a robust institution for ...
Thank you for inviting comments on the proposed rule on roadmap for the use of IFRS by U.S. issue... more Thank you for inviting comments on the proposed rule on roadmap for the use of IFRS by U.S. issuers. My comments are enclosed, along with two papers that give detailed analysis as the basis of these comments.
Attempts to improve financial reporting by adding clarity to its rules and standards through issu... more Attempts to improve financial reporting by adding clarity to its rules and standards through issuance of interpretations and guidance also serve to furnish a better roadmap for evasion through financial engineering. Thus, paradoxically, regulation of financial reporting becomes a victim of its own pursuit of clarity. The interplay between rules written to govern preparation and auditing of financial reports on one hand, and financial engineering of securities to manage the appearance of financial reports on the other, played a significant role in the financial crisis of the recent years. Fundamental rethinking about excessive dependence of financial reporting on written rules (to the exclusion of general acceptance and social norms) may be necessary to preserve the integrity of financial reporting in its losing struggle with financial engineering.
Closed exchange and production-and-exchange economies may have multiple equilibria, a fact that i... more Closed exchange and production-and-exchange economies may have multiple equilibria, a fact that is usually ignored in macroeconomic models. Our basic argument is that default and bankruptcy laws are required to prevent strategic default, and these laws can also serve to provide the conditions for uniqueness. In this paper we report experimental evidence on the effectiveness of this approach to resolving multiplicity: society can assign default penalties on fiat money so the economy selects one of the equilibria. Our data show that the choice of default penalty takes the economy close to the chosen equilibrium. The theory and evidence together reinforce the idea that accounting, bankruptcy and possibly other aspects of social mechanisms play an important role in resolving the otherwise mathematically intractable challenges associated with multiplicity of equilibria in closed economies. Additionally we discuss the politico-economic meaning and experimental implications of default penalties that support an active bankruptcy-modified competitive equilibrium.
I am delighted to have this opportunity to comment on Jerry Feltham and Jinhan Pae's paper, "Anal... more I am delighted to have this opportunity to comment on Jerry Feltham and Jinhan Pae's paper, "Analysis of the Impact of Accounting Accruals on Earnings Uncertainty and Response Coefficients." Accruals constitute the heart of the system of accounting and financial reporting. It is accruals that distinguish accounting from mere counting of cash. Accrual accounting can be defined by the presence of liabilities and noncash assets on the balance sheet. Without accruals, there would be no liabilities and no assets except cash. Accruals require accountants to anticipate the future, and make difficult judgments about events that are uncertain and yet to occur. A greater part of accountants' professionalism consists of making these judgments. Many people who thought that accountants might be replaced by computers are surprised that 40 years later, no such substitution is in sight. While a large part of bookkeeping can be, and has already been, taken over by computers, determination of accruals has not, and cannot be, taken over by computers. In this sense, accruals are the essence of accounting. Which anticipations about the future should be included in the books of account and financial reports, and which ones should be deferred until a later date? Which ones are, in fact, included, and with what frequency? What are the consequences of different answers to these questions for the relationship between financial reports and security prices? These are critical issues that have been before managers, accountants, security analysts, and regulators for at least the past hundred years since the joint stock companies and stock and bond markets became an important part of the U.S. economy. With the explosion of derivative securities in the recent decades, triggered by the cheaper transaction technologies, these questions about accruals have become both more difficult as well as more important. I therefore look forward to research that promises new insights into the nature and consequences of accruals. For this reason, and knowing Professor Feltham's seminal contributions to accounting in the past, I accepted Professor Callen's invitation to discuss this paper with alacrity. 1 admit to being disappointed on the basis of what I have been able to understand of the paper. The paper opens with a reference to Feltham and Ohlson's 1996
This study considers accounting in the new information economy. The basic framework of accounting... more This study considers accounting in the new information economy. The basic framework of accounting for firms reflects a set of contracts and it helps define, implement and enforce these contracts. This framework is stable, and unlikely to change soon. However, the new information technology has been transforming the markets in which firms operate, and opening up new markets. We use a taxonomy identified with Hatfield (1924) and based on markets for managerial talent, investment capital and products. It helps develop a perspective on the changes in organizations and accounting systems. Five aspects of accounting in the new economy are considered. Technology; Information and Efficiency; New Organization design for web commerce; New cost structures and management; and Experimentation with the market for standards. JEL Classification: M41
Attainment of rational expectations equilibria in asset markets calls for the price system to dis... more Attainment of rational expectations equilibria in asset markets calls for the price system to disseminate agents' private information to others. Markets populated by human agents are known to be capable of converging to rational expectations equilibria. This paper reports comparable market outcomes when human agents are replaced by boundedly-rational algorithmic agents who use a simple means-end heuristic. These algorithmic agents lack the capability to optimize; yet outcomes of markets populated by them converge near the equilibrium derived from optimization assumptions. These findings point to market structure (rather than cognition or optimization) being an important determinant of efficient aggregate level outcomes.
In summary, Pareto would have the Ministry of Production choose a s = a * s , compensate those wh... more In summary, Pareto would have the Ministry of Production choose a s = a * s , compensate those who would otherwise be harmed by the choice and later consider how the residual might best be distributed. Kemp and Pezanis-Christou (1999) Economic theorists traditionally banish discussions of information to footnotes. Serious consideration of costs of communication, imperfect knowledge, and the like would, it is believed, complicate without informing. This paper, which analyses competitive markets in which the characteristics of the commodities exchanged are not fully known to at least one of the parties to the transaction, suggests that this comforting myth is false. Some of the most important conclusions of economic theory are not robust to considerations of imperfect information. Rothschild and Stiglitz (1976, p. 629) Agreement on the virtues of free trade as a means to advance the economic welfare of society is a well-known exception to economists' disagreements with one another on other matters of policy. Politicians, and the population at large, seem united in their opposition to free trade in most lands and times. Economists attribute the attitude of politicians to a lack of vision, wisdom, and leadership, while politicians dismiss the free trade arguments as simply academic-a euphemism for irrelevant. In spite of much debate, the arguments have changed little in the two centuries since Torrens and Ricardo proposed the theory of comparative advantage. In this paper we propose to perturb this stasis by recognizing that serious economic obstacles exist in realizing the net gains from trade liberalization. Gains and losses of various agents and groups are unevenly distributed among them, and the information about their magnitude is inherently private. Such information is not truthfully
Design of contracts that define firms, and their accounting systems depends on the conditions in ... more Design of contracts that define firms, and their accounting systems depends on the conditions in the firm's factor and product markets. We examine the fundamental difficulty of defining and developing "uniform" accounting for diverse economic environments across countries and compare the differences in conditions prevailing in some key markets in Japan and the United States. There are important differences in industrial organization, accounting entities, markets for capital, managers, and labor, employee risk bearing, role of government, and market for corporate control. It would be difficult to defend the current reporting practices in either country to be optimal relative to the current or anticipated future market conditions. Instead of making premature commitment to a single set of worldwide standards, there may be value to allowing alternative sets of standards to compete in the marketplace.
Abstract We examine the effect of the incentives of the members of the board of directors on shar... more Abstract We examine the effect of the incentives of the members of the board of directors on shareholder wealth, CEO compensation and the sensitivity of this compensation to corporate performance in laboratory setting. Two methods of appointing the board, one by the CEO ...
By extending the logic of common agencies to international institutions, this paper shows the imp... more By extending the logic of common agencies to international institutions, this paper shows the importance of studying the transfer process among groups within a country as well as among countries in trade negotiations. The consideration of difficulty or facility in transfers as well as the consideration of individual rationality constraint is essential for understanding the incentive mechanism in trade talks under an international organization. In this simple model of asymmetric information, we show that a transfer process uses up additional resources in order to realize the intended transfer. Costly transfers render the internal and international adjustment difficult, and they tend to deter the progress of trade liberalization.
Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch ge... more Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may be saved and copied for your personal and scholarly purposes. You are not to copy documents for public or commercial purposes, to exhibit the documents publicly, to make them publicly available on the internet, or to distribute or otherwise use the documents in public. If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence.
Certification of financial reports is tightly regulated with the intent to ensure the quality of ... more Certification of financial reports is tightly regulated with the intent to ensure the quality of this service. In order to place this market within a larger perspective, Part I of this paper presents archival data on certification activity in the economy. The finding of widespread availability of a diverse set of certifiers for most goods and services points to the competitive conditions that accounting firms may encounter as they attempt to expand their range of services. In Part II we examine an instance of audit firms unsuccessfully competing with non-traditional assurance providers of e-commerce privacy certification. Their failure appears to be attributable, at least in part, to the high cost of certification, inferior standards, and poor compliance by their clients. In Part III we document the types of certification reports issued by government agencies and private certification services. Private certification agencies issue more detailed and informative certification reports compared to government agencies. We discuss the implications of these findings for the market for audit services.
The accounting standardization project, kicked off by the passage of US securities laws in the 19... more The accounting standardization project, kicked off by the passage of US securities laws in the 1930s, has steadily gained momentum over seven decades. Today, written standards dominate accounting thought, practice, regulation, instruction, even research. Generally accepted accounting principles—originally a mere description in its plain English meaning—have since been capitalized into a proper name—Generally Accepted Accounting Principles—and the phrase now describes rules and regulations issued by authorities with power to inflict punishment on those who do not choose to accept them. How and why did financial reporting get caught in the standardization project, replacing social norms of corporate and professional behavior by written rules and standards? What are the consequences of this transformation? What alternative courses are available to accounting and corporate governance? I argue that heavy reliance on the codification of financial reporting has been a wrong path. A shift from rules towards norms of behavior may yet help accounting and corporate governance recover a better balance.
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