Accounting choice, market failure, and regulation

Michael G. Keenan (Department of Accounting and Finance, University of Auckland, Auckland, New Zealand)

Pacific Accounting Review

ISSN: 0114-0582

Publication date: 13 September 2011



The purpose of this paper is to explain the adoption of consolidated accounting for New Zealand holding companies during the period 1946‐1957.


An explanatory, multiple‐case, holistic case study is used to explain the relative increase in consolidated accounting adoption in New Zealand following passage of the Companies Act 1955, in spite of that accounting choice remaining voluntary under the legislation.


The explanation is subjected to replication tests for explanatory case studies, and is supported by the data from all 25 cases satisfying the criterion for inclusion in the study.


The explanation differs from the micro‐economic explanations of accounting choice in terms of firm characteristics which are generated within the positive accounting research paradigm. It utilizes findings from research in the economics of standardization which show that mechanisms for co‐ordinating the behaviour of market participants enable them to capture benefits of market externalities which would otherwise be unavailable because of market failure. The explanation is that: the low rate of pre‐legislation consolidated accounting adoption was due to a market failure around the accounting information which rendered unilateral adoption generally uneconomic; and the post‐legislation surge in adoption was due to passage of the Act resolving the market failure by overcoming a co‐ordination problem for potential adopters, enabling them to realise positive network effects and, therewith, net benefits of adoption.



Keenan, M. (2011), "Accounting choice, market failure, and regulation", Pacific Accounting Review, Vol. 23 No. 2, pp. 101-121.

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