In this paper, we review research into the economic consequences of voluntary and mandatory choices of accounting techniques and standards. We discuss how the predictions of extant economic consequence theories are driven by contracting and monitoring costs associated with management compensation contracts, bond covenants, regulation, and/or political visibility. We review empirical tests of economic consequence theories, categorize those tests, and discuss their strengths and weaknesses. The empirical tests reveal two systematic associations with accounting choice: size, a proxy for political visibility, and leverage, a proxy for contracting and monitoring costs of lending agreements. Interpretation of the results is difficult, due to general limitations of the tests. We conclude by suggesting some directions for future research, based on our analysis of the potential payoffs associated with different types of empirical tests.

This paper contains evidence of a significant negative stock price reaction to media disclosures of ‘subject to’ qualified audit opinions. Disclosures of qualifications in the financial news media (the Wall Street Journal and the Broad Tape) are rare relative to the frequency of audit qualifications. Other studies do not detect an impact of qualified opinions on stock prices. None of the explanations for the difference in the results between this study and prior studies is consistent with the data. We are unable to draw strong inferences because we cannot identify the selection process that produces the sample of media disclosures.