Two Theories of Regulation: Overview

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ap Instructor’s Manual—Chapter 13

CHAPTER 13 Standard Setting: Political Issues 13.1 13.2 Overview Two Theories of Regulation 13.2.1 The Public Interest Theory 13.2.2 The Interest Group Theory 13.2.3Which Theory of Regulation Applies to Standard Setting? 13.3 Conflict and Compromise 13.3.1 An Example of Constituency Conflict 13.3.2 Comprehensive Income 13.3.3 Conclusion re Comprehensive income 13.4 13.5 Rules-Based v. Principles-based Accounting Standards Criteria for Standard Setting 13.5.1 Decision Usefulness 13.5.2 Reduction of Information Asymmetry 13.5.3 Economic Consequences of New Standards 13.5.4 The Political Aspects of Standard Setting 13.5.5 Summary 13.6 International Integration of Capital Markets

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Since current accounting students will be operating increasingly in an international reporting environment, I suggest concentration on the following points:

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Instructor’s Manual—Chapter 13

Benefits of international standards convergence. Claimed benefits include lower financial statement preparation costs, lower network externalities, lower costs of capital, and increased foreign and domestic investment. By and large, current research tends to support these claims, as witnessed by the papers of Hail & Leuz (2006), Frost & Hayes (2006), Barth, Landsman, & Lang (2005), Covrig, DeFond & Hung (2007), and Barth, Landsman, Lang, & Williams (2006) discussed in the text. The basic message is that adoption of IASB standards leads to an improvement in reporting quality over domestic standards, although it is unclear whether or not IASB and FASB standards are of equal quality.

Differences in social, legal, and political institutions across countries create different contracting and investing environments, which show up as lower reporting quality than under United States standards, but which actually represent rational responses to these
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