The Supply and Demand for Accounting Information

Dear Colleagues,

Accounting has traditionally been thought of as having a dual role: 1) supplying information needed to facilitate the stewardship role and mitigate the agency problem, and 2) communicating information about a company’s performance and financial well-being to its existing and potential external stakeholders.

The demand for the stewardship role of accounting derives from the separation of firm ownership and management function. Under the stewardship function, professional managers (agents) manage the firm on behalf of the owners (principals). The stewardship function requires the formulation of incentive contracts designed to align the managers’ interests with those of the owners’, as well as monitoring mechanisms to ensure compliance. Investors and other external stakeholders are able to mitigate the agency problem by making inferences about the managerial effort from accounting disclosures of performance outcomes.

The demand for accounting information under the informativeness role is driven by the desire to maximize shareholder wealth by identifying the most profitable firms. Accounting disclosures, whether mandated or voluntary, provide information needed to assess current outcomes and to predict future cash flow to existing and prospective stakeholders. On the supply side, firms seeking to raise financing have incentives to provide discretionary information about their operations and prospects. A related issue is the usefulness of accounting disclosures. For accounting information to be useful, it needs to be a faithful representation of the outcomes of a firm’s activities, and the information has to be relevant to the needs of the users.  In this regard, standard setters, like the FASB and the IASB, and various regulatory and compliance agencies play a critical role in enhancing the usefulness of accounting information.

Prof. Alex Dontoh
Guest Editor

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• accounting information
• financial disclosure
• principal agent theory
• FASB
• IASB
• IFRS
• capital markets
• Securities Act Of 1933
• SEC
• voluntary disclosure
• financial statements
• conceptual framework
• accounting theory
• positive and normative accounting
• wealth maximization