The Economics of Accounting

In today's dynamic business landscape, understanding the economic roles of accounting is essential: more than simply measuring change in value, accounting information plays a vital role facilitating exchanges, whether within an organization itself or in capital markets. In The Economics of Accounting, Richard M. Frankel, S.P. Kothari, and Luo Zuo take the view that earnings and other accounting outputs help firms function more efficiently by making contracts more effective, aiding decision-making, bridging information gaps, enabling price discovery, and reducing trading costs.

The book provides an accessible overview and analysis of the economic role of financial accounting. Beginning by examining the attributes of accounting earnings and their relation to stock prices, the authors proceed to present a strategic analysis of accounting earnings that recognizes the significant influence they have on decisions made by users and producers. These decisions, in turn, shape the properties of accounting information and its application in valuation, contracting, and firms' investment choices. Throughout the book, the authors argue that accounting information plays a pivotal role in fostering firms' commitment to stakeholder protection, leading to increased value creation for shareholders. The authors offer expert guidance through accounting and its roles in driving efficiency and value creation, unlocking its true potential.

Richard Frankel is Nicholas Dopuch Professor of Accounting at Washington University in St. Louis. Professor Frankel has taught at Washington University in St. Louis since 2005. Prior to that, he was a professor at the MIT Sloan School of Management and the University of Michigan. At Michigan and MIT, he received the MBA Student Awards for Teaching Excellence. His principal teaching interest is financial accounting and reporting. His research focuses on valuation using accounting numbers and on corporate managers' use of conference calls, earnings forecasts, and pro-forma earnings.

S.P. Kothari is Gordon Y Billard Professor of Accounting and Finance at MIT's Sloan School of Management. He has senior executive experience in government, academia, and industry with expertise in strategic and policy issues, securities regulation, and corporate governance. Most recently, he was Chief Economist and Director of the Division of Economic and Risk Analysis at the US Securities and Exchange Commission. Previously, Kothari was deputy dean of MIT Sloan School of Management, global head of equity research for Barclays Global Investors; and director of Bombay Stock Exchange; currently he is a director of Velan Studios and EbixCash. Kothari was awarded India's Padma Shri and Honorary Doctorates from London Business School, University of Cyprus, and University of Technology, Sydney.

Preface

Chapter 1: An Economic Framework of Accounting

Chapter 2: Accounting Earnings and Stock Prices

Chapter 3: The Earnings-Return Relation

Chapter 4: The Economics of Accounting Earnings

Appendix: The Shareholder Value Maximization Principle