Accounting, Economics, and Law: A Convivium

Published by De Gruyter

Volume 1 Issue 1

January 2011

Issue of Accounting, Economics, and Law: A Convivium

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Contents
Journal Overview

Article

Publicly Available January 31, 2011

A Note on Accounting and Economic Theory: Past, Present, and Future

Martin Shubik

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Abstract

This paper deals with the changing relationship between economic theory and accounting practice and theory. It argues that many of the basic problems encountered in practice cannot be avoided in any attempt to construct an economic theory adequate to handle dynamics. In particular problems of timing become critical. Furthermore, there are several critical problems concerning profit maximization, the nature of the rate of interest, agency problems within the firm and the payment of dividends which cannot be dealt with unless there is an adequate reconciliation of accounting and economic theory. Summary includes: history of accounting and economic theory; types and purpose of accounting; information, valuation and control; open problems in economic theory and accounting; a brief glance at the crystal ball; accounting, economics and organization.

Publicly Available January 31, 2011

Risk, Speculation, and OTC Derivatives: An Inaugural Essay for Convivium

Lynn A. Stout

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Abstract

Speculative trading, including speculative trading in derivatives, is often claimed to provide social benefits by decreasing risk and improving the accuracy of market prices. This assumption overlooks the possibility that speculation can be driven not just by differences in traders' risk aversion and information investments, but also by differences in traders' subjective expectations. Disagreement-based speculation erodes traders' returns, increases traders' risks, and can distort market prices. There is reason to believe that by 2008, the market for OTC derivatives may have been dominated by disagreement-based speculation that contributed to the Fall 2008 credit crisis.

Publicly Available January 31, 2011

Some Caution about Property Rights as a Recipe for Economic Development

David Kennedy

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Abstract

Choices about the meaning and allocation of property rights pose the sorts of policy questions familiar to economists thinking about development policy. If we are seeking economic growth of this or that sort, who should have access to what resources and on what conditions? Clear and strong property rights are neither an escape from these questions nor a ready-made answer. Property law is simple one place in which struggles over these questions have been carried out. In this short essay, I review these common, if mistaken, ideas about property rights in the West in light of the Western experience. My objective is to place the strategic choices embedded in any property regime in the foreground and lead one to hesitate before accepting conventional neo-liberal wisdom about the importance of clear or strong property rights for economic development.

Publicly Available January 31, 2011

Legal Form and Economic Substance of Enterprise Groups: Implications for Legal Policy

Kurt A. Strasser, Phillip Blumberg

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Abstract

Although conducted world-wide through hundreds of subsidiaries and affiliates, modern large business is, in economic reality, typically a single economically integrated enterprise functioning with a common objective under the control of its parent company. Yet the prevailing legal models are, for the most part, oblivious to this. Mistakenly adopting outmoded concepts inherited from the misty past, these models focus on many separate subsidiary corporations that make up the business and necessarily overlook the larger whole. The result of this outdated view is a mismatch between business reality and legal form which has led so frequently to poor legal and regulatory decision-making and ineffectual public control. While there is change stirring today, overall the laws response to this mismatch has been piecemeal and unsystematic. After reviewing how we got to this unhappy point, this paper will sketch out a new legal theory of enterprise analysis as the basis of modern corporation law to serve the needs of the Twenty-First Century. In some areas it will replace and in other areas it will supplement existing legal models. Enterprise analysis focuses on the implementation of the underlying policies and rules of the specific body of law at issue, such as securities, tax, or bankruptcy, to determine whether the objectives of that body of law are better served in the specific matter by looking to the whole enterprise or, alternatively, to the particular corporate subsidiary entities involved. While overt recognition of this enterprise analysis has been limited, the American legal system today is in fact applying it in numerous areas.

Publicly Available January 31, 2011

The Legal Structure of the Firm

Jean-Philippe Robé

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Abstract

The notions of firm and corporation are very often confused in the literature on the theory of the firm. In this paper, the two notions are sharply distinguished: the corporation is a legal entity entitled to operate in the legal system and in particular to own assets, to enter into contracts and to incur liabilities. It is used to legally structure firms for numerous reasons, including the need to locate property rights key for the operation of the firm in the ownership of separate, fictitious, legal persons. This avoids ex post-contracting bargaining by parties which otherwise would hold residual control rights over key assets used in the firms operations. The assets partitioning effect of corporate legal personality has also several economizing properties reviewed in the article. The firm is the economic activity developed as a consequence of the cluster of contracts connecting the corporation owning these assets to various holders of resources required in the firms operations. Numerous consequences deriving from this sharp distinction between corporation and firm are explained in this article, including the need to extend the circle of the beneficiaries of the firm managements fiduciary duties.

Publicly Available January 31, 2011

Taxation as Regulation: Carbon Tax, Health Care Tax, Bank Tax and Other Regulatory Taxes

Reuven S Avi-Yonah

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Abstract

This paper addresses three questions: 1. Is regulation a legitimate goal for taxation? 2. Which tax is best suited for regulation? 3. Would it be better to allocate just one goal per tax among the major taxes (individual and corporate income tax and VAT)? It then analyzes the proposed bank tax and the enacted health care tax as regulatory taxes, and concludes that the first is desirable (as is a carbon tax) but the second is not.

Publicly Available January 31, 2011

The Pure Logic of Accounting: A Critique of the Fair Value Revolution

Yuri Biondi

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Abstract

When international accounting standards were renamed to become international financial reporting standards, this seemed to imply that accounting no longer needed to exist, but rather had to be reconsidered as a part of financial communication and advertising. Does traditional accountability no longer matter? Betrayed investors and globalized stakeholders would dissent. A difference of nature continues to exist between fair values disclosed by managers and certified by auditors, and the actual performance generated by the enterprise entity through time, space, and interaction. In a world shaped by complex organizations facing unfolding changes, hazard and limited knowledge, the quest for fundamental principles of accounting is not academic. Accounting principles constitute a primary way that the creation and allocation of business incomes is governed; that is, fairly managed and regulated in the public interest, having respect to other people interests. This article adopts a dualistic posture that opposes the accounting conceptual frameworks based on fair value (market basis) and historical cost and revenue (process basis). The fundamental premises about the underlying economics of the enterprise entity are discussed, including the representation of the business and the concepts of asset and liability. References are made to the case of accounting for intangibles, and to the distinction between equities and liabilities. The cost and revenue accounting perspective is then defended in terms of accountability, but also from the informational viewpoint: historical accounting information plays a special role as a lighthouse in the dynamic and strategic setting of the Share Exchange. In particular, two refinements of the historical cost (and revenue) accounting model are suggested. The first one regards the treatment of earned revenues from continuing operations, and the second, the recognition of shareholders equity interest computed on the actual funds provided in the past, coupled with the distinction between shareholders equity and entity equity.

Publicly Available January 31, 2011

Imagined Worlds of Accounting

Shyam Sunder

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Abstract

Science, engineering, and all other learned disciplines, as well as our socio-political-economic organizations are artifactsresults of our imagination and ingenuity. Modern corporationa marvel of organizational engineeringwould not be possible without imagination. To run organizations, in the face of the centrifugal forces of divergent self-interest and inherently dispersed information, we need accounting. Accounting, too, is an artifact that arose from human imagination, as a precursor of, or contemporaneously with, mathematics, writing and the civilization itself. We explore the case for imagination in our discipline with respect to its environment, scholarship and instruction. Specifically, accounting scholarship includes examination not only of the way things were and are, but also of how they can be. Why should we imagine alternate scenarios, instead of simply waiting for changes to occur, or being forced upon us? We must do so, because imagination is necessary to bring about innovation in practice and in institutions, so our children might live in a better world.

Publicly Available January 31, 2011

Cost Basis: Accounting's "Samson's Tresses"

William A. Terrill

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Abstract

A weakening of the usefulness of accounting for financial purposes of both management and external interestsand perhaps for the internal performance appraisal activities of company managementis seen by the present author if, through the intermingling of different types of economic data, it should be shorn of the objectivity, reliability, and communicability of historical cost. The viewpoint taken is not that accounting should be restricted in its services, but that it should meet them as a comprehensible and consistent methodology.

Notes and Comments

Publicly Available January 31, 2011

Administering Systemic Risk vs. Administering Justice: What Can We Do Now that We Have Agreed to Pay Differences?

Pierre-Charles M. Pradier

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Abstract

Professor Stout's brilliant concept of disagreement-based speculation calls for further developments and studies concerning implications for stability and resilience of the financial system over time. Moreover, it also suggests rediscovering and situating the socio-economic function of finance (and financing) in the economy and society. To complement this approach, we recall the European acceptance of paying differences since late nineteenth century. Derivative assets were traded in Europe, but the underlying assets (stocks and bonds) on which derivatives are built were authorized beforehand. Marteau and Morand (2010) recently appealed for reintroducing an a priori authorization procedure before new derivative assets can be marketed: this view thus inherits a century-long tradition. Eventually, it seems that a priori authorization allows for administration of systemic risk while common law-inherited rejection of disagreement-based speculation is a strong foundation for both supervisory and legal (a posteriori) decisions.

Publicly Available January 31, 2011

Disagreement-Based Trading and Speculation: Implications for Financial Regulation and Economic Theory

Yuri Biondi

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Abstract

Lynn Stouts paper develops an insightful legal-economic analysis of speculative trading. From one hand, the paper discusses the legal-economic framework of speculation and its recent transformation, making reference to the case of derivatives markets crash (and related financial crisis) of 2007. From another hand, the paper foreshadows a thought-provoking economic model of trade (and speculation) based on disagreement, advocating further developments that take into account market manipulation and conflict of interest, whilst relaxing alleged assumptions (and beliefs) on universal fundamental value and perfect forecasting.

Publicly Available January 31, 2011

Avoid Automatic Piercing: A Comment on Blumberg and Strasser

Nicholas L Georgakopoulos

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Abstract

This comment argues against piercing by default, a regime that the arguments of the main piece do not justify. Piercing of subsidiaries veil in contract law is justified but under exceptional circumstances and presumed piercing would not cover all of them. Legislatures, courts, and agencies have moved to validate rather than undermine limited liability. Moreover, automatic piercing would erode the socially desirable incentive for business creation that limited liability provides, reduce or eliminate the markets for venture capital, buyouts and corporate control, and preclude the flexible financing that limited liability makes possible.

Publicly Available January 31, 2011

A Comment on "The Legal Structure of the Firm"

Kurt Strasser

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Abstract

The Legal Structure of the Firm presents two core points. First, it argues that economic reality of the modern business enterprise, what it calls the firm, is different from and much broader than the legal entity or entities into which it is organized. My comment will argue that this first point is correct, well presented here, and a real contribution to our understanding. Second, The Legal Structure of the Firm argues that this separation between the legal entity and the business reality is a good thing, enabling positive asset partitioning and other positive attributes of capital formation which should be preserved. My comment will argue that this point is at best incompletely supported and most likely misdirected.

About this journal

Objective
The Journal of Accounting, Economics, and Law: A Convivium (CONVIVIUM) aims to encourage a comprehensive understanding of the relationship between individuals, organizations, and institutions in economy and society. Among other matters, attention will be paid to financial, economic, and legal methods and languages that have an important albeit neglected role in this relationship. Concerns of finance, control, accountability, responsibility, valuation, regulation, and governance will be raised in their connection with accounting, economics, law, sociology, anthropology, history, finance, political science, and the management and policy sciences. The journal encourages works that seek to recombine disciplinary domains in response to practical and relevant issues, including theoretical advances and insights, and comparative historical perspectives.

The journal is published with the collaboration of the Maison des Sciences de l'Homme - Paris Nord

Editorial Policy
While many journals cover accounting, economics and law separately, the intersection of these fields denotes common and significant concerns in society. Institutional rules and social norms are critical to workings of organizations. Beyond their technical aspects, these issues have broader societal and global consequences. CONVIVIUM is intended to their study.

This journal will pay attention to the institutional analysis of families, businesses, non-business organizations; and their management, finance, control, accountability, responsibility, valuation, regulation, and governance. Financial, economic, and legal devices lie at the heart of business and non business governance and regulation. The journal will examine their influence in the context of social, cultural, and political economy and history.

The journal will explore links among the disciplines in order to yield theoretical insights and perspectives on practice, and seek methodological pluralism and tolerance. Proposals are welcome from sociology, anthropology, history, political science, policy studies, finance, and management sciences.

Focusing at the connections among social disciplines, CONVIVIUM is a unique outlet for inter-disciplinary and combined perspectives. It welcomes transnational co-operative contributions, cross-fertilization of ideas, and will provide a supportive peer review process.

Methodological tolerance and pluralism
Methodological tolerance and pluralism is integral to interdisciplinary research. Formal modeling and quantitative methods of research can serve as a powerful discipline to abstract from myriad of details the essentials of a phenomenon. At the same time, not all the featuring aspects of phenomena are subject to quantification. Therefore, the journal will accept both quantitative and qualitative methods devoted to enhance our understanding of the phenomena of interest. Use of qualitative, quantitative, statistical and modeling methods is recognized.

The journal recognizes that comparative and combined approaches are the most suitable for its purpose. Theoretical, normative, explanatory, interpretative, and historical approaches with contemporary implications will be included. Descriptive studies that provide syntheses of national or international issues; comments, replies and rejoinders; and replications of works published by the journal will be encouraged.

Geographical variety
The journal encourages geographically-varied contributions, particularly those that draw on localized traditions of thought and experience to speak to common concerns. Accordingly, the Editorial Board may accept submissions in languages in English, French, and Italian, with the understanding that the authors' will provide a complete English version of the accepted paper for publication.

Supportive Peer Review Process
The journal welcomes submissions of articles, symposia, and proposals for thematic issues. It supplements its screening and evaluation peer reviews by discussion and cross-fertilization between editors, authors and reviewers, allowing them to move beyond the anonymity of the process, if they so choose, which seems to have outlived its usefulness in the Internet age. Blind peer review is always a choice if this is not preferable.

The reviewers will be expected not only to consider the final publication, but also to submit (i) a relevant set of "suggestions" (further references, structural amendments, and changes), and (ii) a "comment" discussing the paper from their own viewpoint. This comment, and any rejoinder by the author, may be published together with the paper subject to the reviewer's and editor's agreement.

Moreover, each paper will be generally read by at least two reviewers and one member of the Boards, of which at least one will have a primary interest relevant to - but different from - that of the author.

In summary, the journal seeks to attract potential authors through its systematic dedication to the enhancement of their work. The journal wishes to be, in Dante Alighieri's words, a 'Convivium,' convening compelling minds worldwide and promoting significant contributions to the understanding of social phenomena.

Topics

The quality and regulation of accounting
A critique of norms and standards of accounting, such as historical cost, fair value and mark-to-market accounting
National and international institutions of accounting, governance, and regulation
Corporate, fiscal, and securities laws and regulations
Business and not-for-profit accounting, economics, and regulation
Shareholder and stakeholder values and governance
Governmental accounting, economics, and regulation
Socio-economic analysis of family and divorce
Comparative history of accounting, economic, legal thoughts and experiences
Regulation of industries and markets, including environmental and public interest issues
Experimental and behavioral accounting, finance and economics
Accounting, economic, and legal issues in relation to social and cultural norms
Accounting, economic, and legal issues in relation to the theory and analysis of financial and monetary systems
Accounting, economic, and legal issues in relation to the theory and analysis of enterprise groups and multinational firms
Accounting, economic, and legal issues of ownership and property
The role of accounting and control in financial systems, including crises, instability, and resilience

Article formats
Original Research Articles, Commentaries, and Book Reviews.

Information on submission process