13.7 INTERNATIONAL INTEGRATION OF CAPITAL MARKETS
Convergence of Accounting Standards
Effects of Customs and Institutions on Financial Reporting
Enforcement of Accounting Standards
Benefit of Adopting High-Quality Accounting Standards
Should Standard Setters Compete ?
integration fo capital markets in worldwide leads to better-working capital markets, increased investment, and more efficient contracting across the integrated markets
consequently, any evaluation of the political aspects of standard setting must now take international integration into account
a common set of international standards will decrease network externalities
it will reduce costs for investors who don't then have to familiarize themselves with more than one set of GAAP
In common law countries, accounting standards are set, in varying degrees, in the private sector, and are oriented primarily to investors
In contrast, standards in code-law countries were set primarily by governments, hence subject to more political influence than under common law
as a result, additional constituencies are represented within the corporate governance structure under code law
as a result, there's less information asymmetry in code-law countries, since important constituencies are insiders rather than outsiders
Ball, Kohtari, and Robin (BKR) compared the quality of financial reporting in several common law countries in a study spanning 1985-1995
high recognition lag and less conservative accounting suggest that financial reporting in code-law countries is of lower quality than under common law
but this doesn't imply that financial reporting under code law is necessarily more opportunistic than under common law
rather, these differences reflect underlying diferences in institutions, agency costs, and corporate governance structures
in countries with substansial state involvement in the economy, regocnition lag for good news firms was relatively low, while the lag for bad news was relatively high
this tendency to maximize reported earnings through faster recognition of good news an smoothing of losses suggests that a desire to reduce the possibility of further state involvement dominates any concerns firms may have about lower-quality financial reporting and possible racial tensions
accounting standards must be enforced if they are to contribute to higher-quality financial reporting
a related enforcement issue is the protection of small investor
auditing is an important enforcement mechanism. a well-functioning audit contributes to investor confidence and efficient contracting
adoption of high-quality accounting standards is potentially worthwhile, since economies with relatively weak regulatory environments may benefit from higher-quality reporting and consequent strengthening of their capital markets
a benefit of competition in standard setting derives from the impossibility of calculating the socially correct extent of regulation
high-quality accounting standards can also contribute to better working markets
higher earnings quality can lead to more foreign investment
a standard setter with no competition may attempt to maximize its influence by imposing more and more standards, as predicted by the interest group theory of regulation
as a result, the extent of regulation may go beyond its socially optimal level
competition among standard setters would help to control this tendency since firms that didn't like one set of standard could simply adopt the other, thereby causing the overzealous standard setter to "lose customer"