Sunday, January 2, 2011

Towards an Understanding of the Role of Standard Setters in Standard Setting

By Abigail Allen & Karthik Ramanna (H/T SOX First).

Abstract:
We investigate the idiosyncratic influence of standard setters in standard setting. In particular, we examine how FASB members’ length of tenure on the board, their past professional experience, and their political contributions vary with the degree to which the accounting standards they propose are perceived as increasing accounting “relevance” and/or decreasing accounting “reliability.” Among other results, we find that length of tenure on the board and a prior career in investment banking/ investment management are associated with proposing standards perceived as decreasing accounting “reliability;” while contributions to the Democratic Party are associated with proposing standards perceived as increasing accounting “reliability.” Broadly, the evidence, by highlighting the influence of standard setters, can broaden our understanding of the political economy of standard setting beyond the role of corporate lobbying.
Interesting Excerpt:
On the impact of tenure, we find no association between Tenure FASB and increased “relevance,” inc_relv (Panel A). However, the coefficients on Tenure FASB when regressed on decreased “reliability,” dec_relb (Panel B) are positive and statistically significant in columns (1) and (2) (p<.01), suggesting that longer terms of service on the FASB are associated with a perception of decreased accounting “reliability.” To put the coefficients’ magnitudes in perspective, the implication from column (2) is that a one standard deviation increase in tenure (1.39 years) is associated with a decrease in “reliability” that is about 27% of the mean dec_relb value. If the quality of financial statements is increasing in “reliability” (e.g., FASB, 1980), this finding suggests longer average board tenures are associated with diminished standards’ quality.
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