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Papers by John Watts
Journal of Accounting Research, 2001
The proliferation of alternative information sources has reduced the relevance of corporate annua... more The proliferation of alternative information sources has reduced the relevance of corporate annual reports. This paper examines economic outcomes in an oligopolistic industry as investors become better informed but financial reports convey a smaller portion of the total information. Results show that an increase in alternate sources of information, and the resulting decline in relevance of financial reports, leads to a loss in economic efficiency despite the presence of additional information. Investors benefit, but at the expense of consumers and social welfare. Investors benefit not necessarily because the amount of information in the economy increases, but because there is a change in the channels through which the same information is communicated.
Two Models of the Auditor - Client Interaction: Tests with United Kingdom Data
Contemporary Accounting Research, 1997
ABSTRACT Accounting research contains two distinct approaches to the interaction between accounti... more ABSTRACT Accounting research contains two distinct approaches to the interaction between accounting management and the independent auditor. Game theory suggests that the auditor's testing strategy will affect the manager's reporting strategy, and that the strategies form an equilibrium. The game-theoretic approach views the auditor as active, in that he acknowledges the effect that his testing strategy has on the manager's reporting. In contrast, in the decision-theoretic approach, the auditor tests reports, but ignores the effect that his testing might have on the manager's reporting behavior. Essentially, the decision theoretic approach views the auditor as passive, taking the reporting strategy as given when designing tests. We use United Kingdom data to estimate both models and test their validity using nested hypothesis tests. Our results demonstrate that the active, game-theoretic model better describes the auditor-manager interaction. This is the first empirical validation of the game-theoretic model using archival accounting data.
Journal of Accounting Research, 2001
The proliferation of alternative information sources has reduced the relevance of corporate annua... more The proliferation of alternative information sources has reduced the relevance of corporate annual reports. This paper examines economic outcomes in an oligopolistic industry as investors become better informed but financial reports convey a smaller portion of the total information. Results show that an increase in alternate sources of information, and the resulting decline in relevance of financial reports, leads to a loss in economic efficiency despite the presence of additional information. Investors benefit, but at the expense of consumers and social welfare. Investors benefit not necessarily because the amount of information in the economy increases, but because there is a change in the channels through which the same information is communicated.
Two Models of the Auditor - Client Interaction: Tests with United Kingdom Data
Contemporary Accounting Research, 1997
ABSTRACT Accounting research contains two distinct approaches to the interaction between accounti... more ABSTRACT Accounting research contains two distinct approaches to the interaction between accounting management and the independent auditor. Game theory suggests that the auditor's testing strategy will affect the manager's reporting strategy, and that the strategies form an equilibrium. The game-theoretic approach views the auditor as active, in that he acknowledges the effect that his testing strategy has on the manager's reporting. In contrast, in the decision-theoretic approach, the auditor tests reports, but ignores the effect that his testing might have on the manager's reporting behavior. Essentially, the decision theoretic approach views the auditor as passive, taking the reporting strategy as given when designing tests. We use United Kingdom data to estimate both models and test their validity using nested hypothesis tests. Our results demonstrate that the active, game-theoretic model better describes the auditor-manager interaction. This is the first empirical validation of the game-theoretic model using archival accounting data.