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.