Lobbying and Uniform Disclosure Regulation

• DOI: http://doi.org/10.1111/1475-679X.12118
• Published date: 01 June 2016
• Date: 01 June 2016
• Author: HENRY L. FRIEDMAN,MIRKO S. HEINLE

DOI: 10.1111/1475-679X.12118

Journal of Accounting Research

Vol. 54 No. 3 June 2016

Printed in U.S.A.

Lobbying and Uniform Disclosure

Regulation

HENRY L. FRIEDMAN

∗AND MIRKO S. HEINLE

†

Received 22 January 2014; accepted 4 March 2016

ABSTRACT

This study examines the costs and benefits of uniform accounting regula-

tion in the presence of heterogeneous firms that can lobby the regulator. A

commitment to uniform regulation reduces economic distortions caused by

lobbying by creating a free-rider problem between lobbying firms at the cost

of forcing the same treatment on heterogeneous firms. Resolving this trade-

off, an institutional commitment to uniformity is socially desirable when firms

are sufficiently homogeneous or the costs of lobbying to society are large. We

show that the regulatory intensity for a given firm can be increasing or de-

creasing in the degree of uniformity, even though uniformity always reduces

lobbying. Our analysis sheds light on the determinants of standard-setting in-

stitutions and their effects on corporate governance and lobbying efforts.

JEL codes: D72; G38; L51; M40; M41

Keywords: disclosure; regulation; lobbying

∗University of California, Los Angeles; †University of Pennsylvania.

Accepted by Haresh Sapra. The authors thank an anonymous referee, Franklin Allen,

Stan Baiman, Tony Bernardo, Jeremy Bertomeu, Bruce Carlin, Judson Caskey, Itay Goldstein,

Jack Hughes, Wayne Guay, Bob Holthausen, Rick Lambert, Jack Stecher, and workshop par-

ticipants at the 2012 Junior Accounting Theory Conference, 2013 FARS Midyear Meeting,

Carnegie Mellon University, University of Alberta, and University of Waterloofor helpful com-

ments. Mirko Heinle thanks the Wolpow family for financial support. This paper was previ-

ously circulated as “Lobbying and one-size-fits-all disclosure regulation.” Mistakes are the sole

responsibility of the authors.

863

Copyright C, University of Chicago on behalf of the Accounting Research Center,2016

864 H.L.FRIEDMAN AND M.S.HEINLE

1. Introduction

The question of whether to standardize disclosure regulation is a funda-

mental and unanswered problem in accounting research (Dye and Sunder

[2001], Bertomeu and Cheynel [2013]). Individualized regulation (IR) al-

lows for tailoring accounting policies to the characteristics of each regu-

lated firm. Yet, for the most part, accounting rules take a uniform regula-

tion (UR) approach in which, for example, the principles of U.S. GAAP

or IFRS are applied across different firms and industries.1Common argu-

ments in favor of UR are that investors may not understand excessive di-

versity in standards and that uniformity promotes comparability (e.g., Ray

[2012]). We offer an alternative, lesser known benefit of uniformity. Be-

cause firms must lobby over the same set of rules, UR implies that each lob-

byist’s personally costly lobbying effort benefits other lobbyists. Uniformity,

thus, creates a free-rider problem between lobbyists, and greater uniformity

exacerbates this free-riding problem. Hence, uniform rules are less vulner-

able to political influence and serve to reduce equilibrium lobbying efforts

and their social costs.2

In the spirit of Peltzman [1976], Stigler [1971], and recently Bertomeu

and Magee [2011], we model a regulator that is in charge of disclosure

regulation for multiple firms. Each firm faces an agency problem in that an

insider (e.g., a blockholder) can take an action that benefits him/her while

imposing a cost on outsiders (e.g., dispersed investors). As a motivating

example, we focus on asset diversion that is inefficient because the cost to

outsiders exceeds the insider’s benefit (e.g., Shleifer and Vishny [1997]).

Regulation can improve social welfare by reducing insiders’ ability to divert

firm resources for their own gain.

To capture tradeoffs between UR and IR systems, we include a cost to

the regulator of setting different regulations for different firms. A higher

cost of setting different regulations represents a more uniform regulatory

environment. In our model, this cost operationalizes an institutional com-

mitment to common standards, for example, in the form of conceptual

statements or the established preferences of standard-setters. Absent lob-

bying, the regulator chooses the intensity of regulation to minimize diver-

sion, subject to the costs of regulation. While expected diversion decreases

in regulatory intensity, the direct costs of regulation also increase in regu-

latory intensity and, potentially, in regulatory heterogeneity.

1The current FASB chairman, Russell Golden, espoused the benefits of standards in recent

remarks (Golden [2013, p.3]), stating that “standardized financial reporting in the late 19th

and early 20th Centuries helped develop the nation’s steel manufacturing capacity.”

2In this vein, Representative John Dingell (D-MI) said in reference to the FASB: “Their

job is to promulgate accounting standards of high quality that do not favor any particular

industry or interest group and that maintain the credibility of our financial reporting system.

The unparalleled success of the U.S. capital markets is due in no small part to the high quality

of the financial reporting and accounting standards promulgated by FASB” (as quoted in

Beresford [2001, p.78]).