It often provides a perspective that accounting information should be treated like other goods, and demand and supply forces should be allowed to operate so as to generate an optimal supply of information about an entity. Jensen and Meckling, Watts and Zimmerman, Smith and Watts are supporters. ationale! "he argument by some advocates of the #free$market% perspective is that in the absence of regulation there will be private incentives to produce accounting information. &rgani'ations that do not produce information will be penalised by higher cost of capital. B. The Pro-regulation Perspective (ccounting information is a )*ublic +oods% , once available, people can use it without paying and can pass it on to others. *arties that use goods or service without incurring some of the assoicated production costs are referred to as #free$riders-. .ew people will hava an incentive to pay for te goods or services and so does the producers of the particular goods or services, which in turn leads to an underproduction of information. "o alleviate this underproduction, regulation is argued to be necessary to reduce the impacts of market failure. C. The rationale or regulating inancial accounting practice In most developed countries there is a multitude of accounting standards covering a broad cross$section of issues , but do we really need all this regulation/ "here are two broad schools of thought. .or regulation , they don-t agree the free$market approach and support the view that regulation could lead to uniform methods and so enhancing comparability and protect from misleading information. (gainst regulation , the free$market arguments concerns regulation will lead to over$supply of information and would lead to an optimal supply of information by entities. "hey support the Markets view as it is efficient and the markets will provide incentives and penalties to 1 ensure that managers do as the market e0pect. Chapter 3 - The Regulation o inancial accounting !. Regulation " The Theor# or and against Pu$lic %nterest theor# o regulation "he theory proposes that regulation be introduced to protect the public. "his theory assumes that the regulatory body is a neutral arbiter of the #public interest- and does not let its own self$interest impact on its rule$making processes. Rationale& "he protection may be re1uired as a result of inefficient market. Capture theor# o regulation ( contrary perspective of regulations is provided by captured theory which argues that although regulation is often introduced to protect the public, the regulatory mechanisms are often subse1uently controlled 2captured3 so as to protect the interests of particular self$interested groups within society. Rationale& "he #regulated% tend to capture the )regulator%. *osner argues that )the original purposes of the regulatory program are later th'arted through the efforts of the interest group. (cono)ic interest theories o regulation "he theory assumes that everybody acts in their own self$interest, including regulators and those people that are regulated. Rational& #egulators will only propose and support regulation which leads to favorable outcomes for themselves, perhaps in terms of their re$election. 2 Chapte 3 " The Regulation o inancial accounting Accounting regulation as an output o a political process 4. If we accept that the accounting standard$setting process is a political process, then the view that financial accounting should be &b5ective, 6eutral and (political is something that can be easily challenge . Rational& 7ecause financial accounting affects the distribution of wealth within society, it conse1uently will be political. *tandard-*etter Standard$setting bodies typically encourage various affected parties to make submissions on draft version of proposed accounting standards. "his is deemed to be part of the normal #due process-. 8. If we accept that the standard$setters give due consideration to the views e0pressed in the various submissions they receive, then we must accept that accounting standards, and therefore financial accounting reports, are the result of various social and economic considerations. 9ence they are very much standards are developed. "herefore it is arguably very 1uestionable whether financial accounting should claim to be )neutral% or )ob5ective%. :. While it is accepted that accounting standards are developed having regard to social and economic conse1uences, it is also a re1uirement in many 5urisdictions that corporate financial statement be )"rue and .air%. Rational& *erhaps it is easier to say they are )fair%. It is doubtful to say the financial statements are )true )when the standards are 3 determined depending on various economic and social conse1uences. 4
The Mckinnon-Shaw Hypothesis: Thirty Years On: A Review of Recent Developments in Financial Liberalization Theory by DR Firdu Gemech and Professor John Struthers