Economics of Accounting Earnings

Abstract

This monograph is not a review of the empirical accounting literature. This monograph tells a story and relates it to salient empirical phenomena. Why does accounting exist? Our answer is that financial accounting helps firms function efficiently. That efficiency is manifested in many ways, and it is contextual (e.g., investment decisions and capital allocation, corporate governance, managers’ performance assessment, and contracts among various stakeholders). We often use shareholder value as the measure of efficiency, though we discuss regulation, social and contract efficiency.