Externalities and Financial Reporting GEORGE FOSTER* REFERENCES THE EXISTENCE of externalities in financial reporting are being TO made increasingly in the literature. For instance, a committee of the American Accounting Association [19771 observed that âfinancial accounting information shares much in common with the more traditional examples of externalitiesâ and that âwithout intervention, too little information will be produced. This is one of the standard arguments for. . . disclosure policiesââ (p. 24).â This paper will discuss (a) the various ways that externalities may arise in financial reporting, and (b) how the traditional economic approaches to âcontrollingâ for externalities apply in that context. One purpose of the discussion is to guide future empirical research on the significance of and problems in âcontrollingâ externalities in financial reporting. There is far from unanimity about the meaning of the externality term in the economics literature.2 The definition adopted here stresses the interdependence notion and has antecedents dating back to at least 1962-see Buchanan and Stubblebine . An externality will be said to exist when the utility of individual m(U,) is a function not only of his action choices (a,) and the state occurrence ( s n ) ,but also of the action
The Journal of Finance – Wiley
Published: May 1, 1980
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