Externalities and Financial Reporting

Externalities and Financial Reporting 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 “financial accounting information shares much in common with the more traditional examples of externalities” and that “without intervention, too little information will be produced. This is one of the standard arguments for. . . disclosure policies’’ (p. 24).’ This paper will discuss (a) the various ways that externalities may arise in financial reporting, and (b) how the traditional economic approaches to “controlling” for externalities apply in that context. One purpose of the discussion is to guide future empirical research on the significance of and problems in “controlling” 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 [1962]. 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 http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Finance Wiley

Externalities and Financial Reporting

The Journal of Finance, Volume 35 (2) – May 1, 1980

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Publisher
Wiley
Copyright
1980 The American Finance Association
ISSN
0022-1082
eISSN
1540-6261
D.O.I.
10.1111/j.1540-6261.1980.tb02183.x
Publisher site
See Article on Publisher Site

Abstract

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 “financial accounting information shares much in common with the more traditional examples of externalities” and that “without intervention, too little information will be produced. This is one of the standard arguments for. . . disclosure policies’’ (p. 24).’ This paper will discuss (a) the various ways that externalities may arise in financial reporting, and (b) how the traditional economic approaches to “controlling” for externalities apply in that context. One purpose of the discussion is to guide future empirical research on the significance of and problems in “controlling” 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 [1962]. 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

Journal

The Journal of FinanceWiley

Published: May 1, 1980

References

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