Evidence-Based Policymaking: Promise, Challenges and Opportunities for Accounting and Financial Markets Research

Abstract

The use of evidence and economic analysis in policymaking is on the rise, and accounting standard setting and financial regulation are no exception. This article discusses the promise of evidence-based policymaking in accounting and financial markets as well as the challenges and opportunities for research supporting this endeavor. In principle, using sound theory and robust empirical evidence should lead to better policies and regulations. But despite its obvious appeal and substantial promise, evidence-based policymaking is easier demanded than done. It faces many challenges related to the difficulty of providing relevant causal evidence, lack of data, the reliability of published research, and the transmission of research findings. Overcoming these challenges requires substantial infrastructure investments for generating and disseminating relevant research. To illustrate this point, I draw parallels to the rise of evidence-based medicine. The article provides several concrete suggestions for the research process and the aggregation of research findings if scientific evidence is to inform policymaking. I discuss how policymakers can foster and support policy-relevant research, chiefly by providing and generating data. The article also points to potential pitfalls when research becomes increasingly policy-oriented.JEL classification: A11, D61, D72, G18, G38, K22, L51, M48 * This paper is based on my 2017 PD Leake Lecture at the ICAEW. I acknowledge helpful comments from the editors, Luzi Hail, Christian Laux and, especially, Maximilian Muhn. I also thank Maximilian Muhn for his excellent research assistance. I have worked as an economic advisor to the PCAOB and still serve as a consultant from time to time. I have also co-written independent research reports on policy questions for the FASB and the SASB. The views expressed in this paper are my own.

Why Do Individual Investors Disregard Accounting Information? The Roles of Information Awareness and Acquisition Costs

“…Protecting individual investors has long been an SEC priority and was reinforced by the Dodd‐Frank Act in 2010. Former Chairperson Mary Jo White has said: “The retail investor must be a constant focus of the SEC—if we fail to serve and safeguard the retail investor, we have not fulfilled our mission.” While our study does not comprehensively analyze the SEC's efforts to help individual investors, we aim to provide evidence for policy‐making discussions (Leuz []). To that end, this section provides examples of regulations designed in part to aid individual investors by reducing information awareness and acquisition costs, as described using language drawn from the cost‐benefit analyses within those regulations.…”

“…Second, our framework and findings can contribute to evidence‐based policy making (Leuz []). Understanding the behavior of individual investors is critical to designing and evaluating investor protections (SEC []) .…”