The roles of financial asset market failure denial and the economic crisis: Reflections on

Description
Throughout the world every economic and socio-economic indicator has deteriorated. The
so-called ‘real economy’ has been deeply contaminated by the most significant global
financial crisis for seven decades. The ultimate extent and duration of this rampant degeneration
and its longer-term political effects are unpredictable but what caused the crisis?
This paper examines a range of suppositions made in theories which deny the possibility of
financial asset market failure and identifies ways in which they contributed to the circumstances
and actions which created the current crisis.

The roles of ?nancial asset market failure denial and the economic
crisis: Re?ections on accounting and ?nancial theories and practices
Brendan McSweeney
Royal Holloway, University of London, United Kingdom
a r t i c l e i n f o a b s t r a c t
Throughout the world every economic and socio-economic indicator has deteriorated. The
so-called ‘real economy’ has been deeply contaminated by the most signi?cant global
?nancial crisis for seven decades. The ultimate extent and duration of this rampant degen-
eration and its longer-term political effects are unpredictable but what caused the crisis?
This paper examines a range of suppositions made in theories which deny the possibility of
?nancial asset market failure and identi?es ways in which they contributed to the circum-
stances and actions which created the current crisis.
Ó 2009 Elsevier Ltd. All rights reserved.
Genesis
The crisis, it seems, was triggered by a bursting housing
bubble, principally but not exclusively, in the United States
(US). This lead not only to huge mortgage defaults but ex-
posed immense levels of other ‘toxic’ assets (i.e. hugely
overvalued complex composites of insecure mortgages,
credit card and store loans, and other credit bricolage
whose expansion had been encouraged by con?dence in
ever rising house prices). The result was enormous losses
by ?nancial institutions in many countries, not just in the
US but mainly also, but not exclusively, in a number of
European countries, as ?nancial liberalization had enabled
the transnational buying and selling of these toxic assets.
Outside of the US, international capital ?ows are predom-
inantly in the greater Europe area and thus the interna-
tional dispersion of toxic assets was not worldwide
(Thompson, 2008). Their geographical origin, however,
was mainly in Anglo-American countries where consump-
tion of goods and services had increasingly been main-
tained by the expansion of personal borrowing rather
than by wages and salaries constrained or diminished by
considerable outsourcing to China (or elsewhere) and by
dilution of employee protection.
In these countries there was ‘‘privatized Keynesianism”
(Crouch, 2008). In place of a considerable portion of poten-
tial government spending, including investment
1
– much
of which could have been ?nanced by curtailing the enor-
mous tax privileges of the super-rich (Toynbee & Walker,
2008) – the process was ‘‘privatized”. It relied on the cred-
it-based consumption of Anglo-American lower and mid-
dle-income families. In the UK, for example, between 1998
and 2007 the borrowing to personal income ratio rose by
48% (Barrel, Hurst, & Kirby, 2008). There was a similar trend
in the US where between 2000 and 2007 private debt ex-
pressed as a proportion of GDP rose from 130% to 174%
(Godley, Papadimitriou, & Zezza, 2008). During the same
period the borrowing to personal income ratio fell margin-
ally in Germany. In June 2008, the UK’s National Statistics
Of?ce reported that UK households in total now owe a high-
er portion of their income in debt than has been the case for
any other developed economy at any point in history
(Watson, 2008).
But the collapsing housing bubble was neither a neces-
sary nor a suf?cient event to have created the current cri-
sis. Periods of ?nancial stress have not always been
followed by recessions or even by economic downturns
0361-3682/$ - see front matter Ó 2009 Elsevier Ltd. All rights reserved.
doi:10.1016/j.aos.2009.04.007
E-mail address: [email protected]
1
Investment here means any increase in tangible or intangible assets
including physical investment, training, R&D, etc.
Accounting, Organizations and Society 34 (2009) 835–848
Contents lists available at ScienceDirect
Accounting, Organizations and Society
j our nal homepage: www. el sevi er. com/ l ocat e/ aos
(International Monetary Fund, 2008). Financial institutions
with adequate reserves would have been able to withstand
the shocks without restricting lending. But too many were
over-exposed not only because of their careless acquisition
of ‘‘toxic assets” – often knowingly or unwittingly created
by sellers from their risky and even distressed liabilities –
but also as a result of: unwise and overly speculative activ-
ities; ‘‘light touch” regulatory de-emphasis on risk
constraints, such as required reserve ratios; and the dis-
gorging of immense amounts of cash as bonus payments.
Although much media commentary on executive pay has
focused on that of CEO’s in non-?nancial corporations,
the pay of many ‘professionals’ in ?nancial asset markets
(hereafter ‘?nancial markets’) was far greater. By one esti-
mate, the top 20 hedge fund managers earned more in
2005 than all 500 CEO’s of the S&P 500 (Kaplan, 2008).
2
The ‘wages’ of the ?nancial markets ‘‘ringmaster class”
(Blair, 2008, p. 2) were astronomical.
Liabilities – often camou?aged by complex ‘innova-
tions’ which many bankers and regulators apparently did
not understand – were piled on very slender asset bases
(Crockett, Harris, Mishkin, & White, 2003). Losses (known
and unknown), exposure, and fear caused over-leveraged
?nancial institutions to restrict lending to each other and
to non-?nancial institutions who were also over-leveraged
because of the dividend and stock buy-back demands of
?nancial markets leading to further declines in asset prices,
creating more losses, more fragility – and so on. A vicious
circle of deleveraging and capital rationing commenced
creating a self-reinforcing downward spiral in ?nancial
and other markets. The full consequences, depth and dura-
tion of this ‘domino-effect’ are, as yet, uncertain.
In theories which denied the possibility of market fail-
ure, and speci?cally ?nancial market failure, this crisis
was supposed to be impossible. The occurrence of minor
deviations from ‘fundamental’ values and occasional local-
ised speculative bubbles was sometimes acknowledged,
but it was held that provided markets are uninhibited by
government, or other ‘constraints’, self-correction and on-
going growth were inevitable. Financial markets were
deemed to be self-optimizing, accurately valuing assets
and achieving optimal resource allocation. Disturbances
were supposed to be always exogenous, never endogenous,
and rapidly and effectively absorbed. Markets, it was said,
move naturally towards an equilibrium state which is also
the optimal state. In short, there was supposed to be a
blissful conjunction of economic growth and public wel-
fare (Cowen, 1988; Rajan & Zingela, 2003; Rand, 1986;
Rothbard, 1993).
Contrary to these denials of the possibility of the failure
of contemporary ?nancial markets, ?nancial markets have
failed. This paper will consider three properties of ?nancial
markets which enabled that failure. The discussion of each
of the three properties includes a commentary on a range
of roles played by accounting in strengthening and en-
abling conditions and processes which led to the current
economic crisis.
Failure by signal
Rather than providing failure-avoiding information, ?nancial
markets create information which leads to market failure
A fundamental supposition of the theories which deny
the possibility of market failure is that asset prices re?ect
effective analysis of the necessary information required to
calculate the correct prices. Misguided or ill informed anal-
ysis by some individual buyers and sellers of ?nancial as-
sets are deemed possible but never on a suf?cient scale to
undermine the accuracy of the prices determined by the
aggregate buying, selling, and holding. A ?nancial market
is conceived in market failure denying theories as an opti-
mally ef?cient and effective discovery procedure for pro-
cessing, concentrating, and concisely transmitting (via
price signals) correct valuations of assets (Allen, 1981; Ben-
ston, 1989; Benston, 1990; Citanna & Villanacci, 2000;
Grossman & Stiglitz, 1980; Malkiel, 2005; Mossin, 1966).
There are a number of fundamental problems with this
view of the epistemic capability of ?nancial markets,
namely: (a) the existence of uncertainty; (b) over-reliance
on past experience; and (c) irrational analysis and actions.
Even if it is supposed that ?nancial market activists always
act rationally, market failure is still possible (Keynes, 1936;
Minsky, 1992). However, that possibility is all the greater
because there is extensive evidence of irrational analysis
and actions by ‘investors’(Arthur, 2000; Ball & Bartov,
1996; Campbell & Limmack, 1997; Cho, Lonton, & Whang,
2007; Foster, Olson, & Shevlin, 1984; French, 1980; Gar?n-
kel & Sokobin, 2006; Keim & Stambaugh, 1984; Liang,
2003; Pettengill, 2003; Wang, Li, & Erickson, 1997; Rashes,
2001; Shiller, 2000, for instance).
Uncertainty: Consumption goods are valued on bene?ts
to be immediately received, ?nancial assets are valued on
disparate (heterogeneous) expectations about the future
whose content is never wholly predictable. Despite this
characteristic of ?nancial markets, Rappaport states that:
‘‘y closely reading the stock market, managers can ?nd
out whether proposed strategies will be effective” (1987,
p. 57) (emphasis added). But notions of valuation which ne-
glect uncertainty imply no novelty, no effects of human
re?exivity, and therefore no surprises. Soros calls the denial
of uncertainty in ?nancial markets ‘‘absurd” (2003, p. 3).
Knight observes that: ‘‘contingency or ‘chance’ is an unan-
alyzable fact of nature” (1965, p. lxiii). John Maynard Key-
nes states that: ‘‘our knowledge of the factors which will
govern the yield of an investment some years hence is usu-
ally very slight and often negligible” (1936, p. 149). In the
real world ‘‘forecasting is dif?cult if it really is about the
future” (McCloskey, 1991). Only in romanticized or fantasy
notions of ?nancial markets can this unavoidable and
incorrigible condition be by-passed. Uncertainty cannot
be analyzed away. Choices made in real time are never
made with complete information. Extensive and often sig-
ni?cant unpredictable and unanticipated events occur. So,
errors in valuations, which are based on expectations, will
also be extensive and signi?cant. In short, because of ineli-
minable ignorance of the future an optimum equilibrium is
not consistently attainable.
2
In the UK, it has been estimated that a pensioner with a private pension
will pay out 40% of their investment in fees over the lifetime of the
investment (Manthorpe, 2008).
836 B. McSweeney / Accounting, Organizations and Society 34 (2009) 835–848
The level of valuations in balance sheets of assets (and
liabilities) may shape decisions and actions within, by, or
towards corporations including the avoidance of regula-
tory constraints by ?nancial institutions. An essential
requirement of de?ning something (visible or invisible)
as an asset is that ‘it’ is assumed to be able to generate
future bene?ts. The actual monetary valuations of assets
rely on even more speci?c (and uncertain) expectations.
Increasingly ?nancial reporting regulatory bodies have re-
quired that many assets and liabilities be valued at ‘fair
value’
3
(FASB, 2006). Many proponents of fair value account-
ing implicitly assume that ?nancial markets are ef?cient.
Fair value valuations are supposed to both re?ect and rein-
force that ef?ciency, the latter by better diffusion of real
time information on objective asset and liability valuations
(cf. Biondi, 2007; Boyer, 2007). For assets for which prices
can be identi?ed in active markets, fair value is usually
equivalent to market value (‘mark-to-market’). Mark-to-
market valuations of the now infamous ‘securitized’ assets,
such as collateralized debt obligations, were readily avail-
able and used. These assets were primarily traded through
over-the-counter markets (Plantin, Sapra, & Shin, 2008).
Yet, as we now know, those market valuations of largely
opaque composite assets were often wildly overstated. In
times of excessive exuberance current market values mirror
and bolster valuations which ultimately must fall. Addition-
ally, there is considerable management discretion in deter-
mining the timing and amount of asset valuation or
revaluation, especially, for non-traded or infrequently
traded assets (Hilton & O’Brien, 2009; Riedel, 2004; Plantin
et al., 2008). Lev argues that the move toward fair value
accounting ‘‘enhances considerably the role of estimates in
?nancial reports” (2003, p. 1).
The claim that fair value accounting provides ‘‘faithful
representation of reality” (Chartered Financial Analysts’
Institute, 2008, and others), is wrong. Why? As valuations
necessarily rely on expectations about hypothetical future
events (McSweeney, 2000) that claim could only be true
if markets (or accountants or other managers) had infalli-
ble powers of forecasting. But nothing and nobody has that
power. It was inevitable that in bubble times the momen-
tum of fair valuations of assets in general was towards
over-valuation fuelled by the too-rosy and speculative
expectations and added to that contagion.
4
Whether the
consequence of this, of what Boyer (2007) calls the ‘‘acceler-
ator effect” of fair value accounting: fuelled by and itself
fuelling overly optimistic views will now reinforce overly
pessimistic ones will in part depend on the extent to which
asset values of ?nancial and non-?nancial corporations are
revalued downward to new lower fair values (Deloitte,
2009).
The notion of the unbiased determinacy of the future by
?nancial markets is in?ated to an even higher imaginary
level by the claim that asset values are the discounted va-
lue of future net cash ?ows or of expected future net cash
?ows (Fatemi & Luft, 2002; Williams, 1938). The future is
supposedly predictable with such certainty that future cir-
cumstances and future actions are known with such preci-
sion that all future cash ?ows, interest rates, and so forth
are knowable, albeit not by individuals but by ‘the’ market,
and thus can be systematically discounted. Many text-
books, many practitioner journal articles, and some schol-
arly journal articles provide unrealistic examples of a
perfectly predictable world, knowable, indeed quanti?able,
through discounted cash ?ow analysis (Allen, 1994;
McKinsey, Copeland, Koller, & Murrin, 2000; Penman,
2001). But such perfect knowledge, as King (1975) states,
is that which ‘‘only God could provide”.
Overreliance On Past Experience: Prior to the current cri-
sis, circumstances increasingly encouraged an over-opti-
mistic view of the future based on past experience.
World-wide there was a long period of relative stability.
In the United States, for instance, up until and into 2008,
only ?ve quarters in the past 22 years exhibited declines
in GDP and those declines were small. Many economists
spoke of the ‘‘Great Moderation” – the idea that ?nancial
systems and the global economy had become so stable
and sophisticated that they were free of volatility (Gian-
none, Lenza, & Reichlin, 2008). In 2000, the United King-
dom’s then Chancellor of the Exchequer (now its Prime
Minister), Brown, stated that he had ended economic
‘‘boom and bust”. Notwithstanding the 15 occasions on
which there were ?rst magnitude stock market crashes in
the 20th century (Bruner & Carr, 2007), the general trend
in the later part of that century was robustly upwards
and many ?nancial market activists had never ‘‘seen a
world where almost all asset classes could swing widely
in value” (Tett, 2008). This reinforced beliefs that ?nancial
market valuations would continue to rise in value. Finan-
cial market valuations were increasingly self-created.
Consequently, Greenspan observes, people experiencing
such lengthy growth or stability ‘‘are prone to excess”
(2005). As in Keynes’s famous ‘‘beauty contest” analogy,
market activists anticipating the average, and in this
context over-optimistic, and over-con?dent, opinion of fu-
ture ?nancial asset prices, drove those prices up ever
further.
5
The exuberant view was also encouraged by widely
employed asset pricing models, such as the Capital Asset
Pricing Model, which predict that a permanent decline
in fundamental volatility ultimately results in a perma-
nent decline in ?nancial market volatility (Campbell,
2005; Dyckman, Downes, & Magee, 1975). Even holders
3
Under fair value accounting, assets and liabilities are carried on balance
sheets at their market value, if known, or at fair value, which is de?ned as
the amount for which an asset could be exchanged, or a liability settled,
between knowledgeable, willing parties in an arm’s length transition
(European Central Bank, 2004).
4
Whether fair value should be used and its comparative advantages and
disadvantages with other valuation bases are beyond the scope of this
paper. The criticism here is of the naive epistemology and romantic notion
of markets frequently employed by many supporters of fair value. The joint
suggestion by the Financial Accounting Standards Board and the Interna-
tional Accounting Standards Board in late 2008 to remove the terms
‘‘expected” bene?ts (IASB) and ‘‘probable” bene?ts (FASB) from their
respective de?nitions of an asset and to de?ne an asset as ‘‘. . . a present
economic resource to which the entity has a right or other access that
others do not have” does not remove the unexpungible reliance of asset
valuations on fallible expectations (FASB/IASB, 2008).
5
Overcon?dence is a frequently observed behavioural bias in psycho-
logical studies.
B. McSweeney / Accounting, Organizations and Society 34 (2009) 835–848 837
of ?nancial assets who were wary of long-term prospects
had incentives to buy because they thought they could
sell the assets in the short term to others (‘‘the greater
fools”) with more optimistic long-term beliefs. Optimism
was also reinforced by the apparent rapidity of ‘‘correc-
tions”. The severe over-reaction to the .com exuberance
did not have sustained major impacts in the ‘real’ econ-
omy. Interest rates were quickly reduced, the hedge fund
Long Term Capital Management was rapidly rescued in
1998, and the general upward rise in share prices soon
returned.
But ultimately over-optimism is not durable, it pushes
markets towards instability (Keynes, 1936; Minsky,
1992). Instability is endogenous to ?nancial markets. The
rosy view reduced risk premia and encouraged ever more
leverage and speculation. Instead of tempering that excess
and providing sober assessment, ?nancial markets were
fuelled by excess and fuelled excess.
Irrationality: The emergence and inevitable collapse of
unfettered speculative bubbles can be explained without
depicting ?nancial market activists as irrational. However,
there is a long-standing body of empirical studies demon-
strating that ?nancial markets are also characterised by
irrationalities which further fuel the conditions and prac-
tices which ultimately lead to catastrophic destabilization.
Identi?ed irrationalities include: psychological contagion
leading to irrational exuberance (Shiller, 2000); herd
mentality (Arthur, 2000); panics and over-reaction to
prospects of losses (Campbell & Limmack, 1997); under-
reaction to earnings (pro?t) information (Bernard and
Thomas, 1990; Ball & Bartov, 1996; Foster et al., 1984;
Gar?nkel & Sokobin, 2006; Liang, 2003); and a range of
seasonal and day-of-the-week patterns (Cho et al., 2007;
French, 1980; Keim & Stambaugh, 1984; Pettengill,
2003; Wang et al., 1997). At times, ‘‘massively confused
investors” make ‘‘conspicuously ignorant choices”
(Rashes, 2001).
Whether study of these irrationalities can provide supe-
rior ‘investment’ strategies is not of concern here. What the
?ndings demonstrate is that ?nancial markets are not
characterised by the rational signalling capability neces-
sary to exclude the possibility of market failure. Although
the bedrock assumptions of pervasive and enduring ?nan-
cial market ef?ciency have been challenged in the account-
ing literature, it seems that the notion of market
inef?ciencies (often called ‘behavioural ?nance’) has
gained a more signi?cant place in ?nance literature than
in its accounting counterpart (Kotharai, 2001).
Although ?nancial market valuations are not entirely at
all times and in every instance determined by untethered
emotions, rumours, and ignorance, ?nancial markets do
not have an endogenous ability to limit the effects of these
characteristics and are thus not self-adjusting. Markets are
ongoingly created by people, not by nature. The idea that
?nancial markets always effectively price assets encour-
aged speculative purchasing in times of rising prices and
contributed to the growth of speculative bubbles. It also
discouraged central banks from attempting to prick asset
price bubbles.
A voluminous amount of research examining the
possible relation between published ?nancial statement
information and ?nancial markets (usually referred to as
‘capital markets research’) has been published. A large
fraction of published research in many leading accounting
journals is of that type (Kotharai, 2001). Predominantly,
its topic selection, research design, and interpretation of
research ?ndings rely implicitly or explicitly on the
assumptions of ?nancial market failure denial. Stock re-
turns are deemed to re?ect changes in the present value
of expected future dividends – Nissim and Penman
(2001) and Ou and Penman (1992), for instance, refer to
this supposed quality as ‘‘non-controversial” – market
capitalization is regarded as the normative benchmark
for ?rm value, to be equivalent to ‘fundamental’ value,
and the economic consequences of ?nancial market trad-
ing are assumed to be always and everywhere undoubt-
edly positive (Lee, 2005). In place of the nuances and
contingencies often speci?ed in the accounting and ?-
nance literature which ?rst spawned capital markets re-
search within these disciplines (Beaver, 1968, for
example) the suppositions of ?nancial market failure de-
nial have widely become caveat-free operating research
assumptions. The positive ‘revolution’ in accounting has
been admirable in its desire to provide veri?ed ?ndings
in place of the strong normative beliefs which drove a
greater deal of early accounting research (Hopwood,
2007). But too often the explicitly normative has been re-
placed in capital markets research in accounting with for-
mative suppositions that are unreal. In those instances,
the explicitly normative has in effect merely been re-
placed by a desire to narrowly prove the implicitly nor-
mative. The ‘ought’ is not distinguished from the ‘is’, but
rather they are merged.
Failure by unrestrained purpose
Weakly regulated ?nancial markets are unbalanced and
encourage a lack of balance
Speculative ‘‘bubbles on a steady stream of enterprise”
do not necessarily become ‘‘the bubble on a whirlpool of
speculation” (Keynes, 1936, p. 159) but in many countries
?nancial markets which always contain elements of spec-
ulation became speculative markets. How was this
possible?
Financial market failure denial was the bedrock of two
related processes over the past few decades: the hollow-
ing-out of regulatory constraints and the domination of
corporate governance policies by the notion of maximizing
shareholder value. Both not merely enabled greater specu-
lation but also encouraged it.
De-regulation and Non-regulation: it has been argued
that the crisis is not evidence of market failure but of the
adverse consequence of ‘interference’ in markets. The
President of the Czech Republic, which assumed the pres-
idency of the European Union for the ?rst half of 2009,
for instance, states that ‘‘economic crisis should be re-
garded as an unavoidable consequence and hence a ‘‘just
price” we have to pay for immodest and overcon?dent pol-
iticians playing with the market” (Klaus, 2009). But the
growth in massive speculative bubbles (in ?nancial and
838 B. McSweeney / Accounting, Organizations and Society 34 (2009) 835–848
other markets) occurred within an era of: (a) radical reduc-
tion in regulation
6
– ‘‘light-touch” regimes; and (b) the
growth of an ever-larger portion of ?nancial markets free
of most regulations (Financial Times, 2009). At the end of
2007 roughly 11,000 essentially unregulated, mainly unau-
dited, and largely off-shore domiciled hedge funds world-
wide controlled about
7
$2,250 billion in assets. The largest
3% of hedge funds accounted for three-quarters of total
hedge fund assets in 2007 (International Financial Services
London, 2008). The extent to which these regulatory
changes occurred varied between countries, but everywhere
the trend was towards dilution. Both changes were largely
premised on a belief in the ef?cacy of ‘free’ markets.
Although rarely directly ‘captured’ by speci?c ?nancial insti-
tutions, too often regulators and the executive branch of
governments, from which few regulators were effectively
independent, were in thrall to an unreal and romanticised
notion of ?nancial markets and thus were ‘captured’. As a re-
sult, rare interventions were largely aimed at reinforcing not
correcting markets.
An obsession with regulatory failure meant blindness
about market failure as encapsulated in a famous state-
ment by US president Ronald Reagan: ‘‘government is not
the solution to our problem; government is the problem”
(1981). Regulatory oversight was seen as the mere views
of individuals inherently inferior to the mighty epistemic
capability of markets. On the other hand, whatever individ-
ual market participants did was perceived to feed into that
rei?ed epistime and therefore to be beyond critique or
questioning. Where it really mattered there was little over-
sight, in effect unregulating regulation which enabled and
legitimated excess and ultimately led to failure. As the IMF
recently observed, ‘‘economies with more-arm’s length or
market-based ?nancial systems seem to be particularly
vulnerable to sharp contradictions in activity in the face
of ?nancial stress” (2008, p. xiii). The collapse and contam-
ination began in the most liberalized ?nancial markets.
Self-destruction not self-correction has been the outcome.
An idealized system said to sustain and enhance ‘‘desir-
able” effects and to estop ‘‘undesirable” ones (Bator,
1958) has been revealed as one capable of disintegration
and blighting of product and service markets.
Shareholder Value: More than 70 years has not dimmed
the topicality of the long-running debate ?rst highlighted
by Berle and Means (1932) about what should be the cen-
tral purpose of corporations. But in the era of ?nancial
market de-regulation and non-regulation, the idea that
corporations (?nancial and non-?nancial) should be run
with the primary, even exclusive, goal of maximizing the
valuation of each corporation by ?nancial markets – usu-
ally termed ‘maximizing shareholder value’ – came to
dominate corporate governance regimes and wider aspects
of the political economies ?rst in Anglo-American coun-
tries and increasingly in many other countries (Ezzamel,
Willmott, & Worthington, 2008; Jürgens, Naumann, &
Ruoo, 2000; Morin, 2000; O’Sullivan, 2007; Rose & Mejer,
2003). That purpose leads, it was said, to superior corpo-
rate and national economic performance (Hansmann &
Kraakman, 2001). And through ‘trickle-down’, and other
processes, everyone would bene?t – the ‘rising tide would
lift all boats’ (Sperling, 2007).
Grant Thornton, ‘‘one of the world’s leading accounting
and consulting ?rms” glowingly states that:
Successful companies, ones that maximize shareholder
value, enjoy higher overall productivity and competi-
tiveness . . . These companies create employment,
remunerate workers at levels that minimize dissatisfac-
tion, and enhance job security as demand for their prod-
ucts and services is higher. Customers will receive
higher quality goods than their competitors at a reason-
able cost, and debt holders have better overall security
and become eager to lend even more capital. This cycle
becomes self-propelling to create momentum within
companies, which strengthens the various stakeholder
positions” (2009, p.1).
No supporting evidence is provided by Grant Thornton
for any of these highly contestable claims (Lee, 2005; McS-
weeney, 2008, 2007; Stout, 2007).
Except in abnormal circumstances, the maximizing
shareholder value norm is legally virtually unenforceable,
even in Anglo-American countries. The Supreme Court in
Delaware, for instance, a state in which the great majority
of large US corporations have their legal headquarters, has
frequently stated and implied that ‘‘there are few decisions
not involving outright self-dealing [by management] that
shareholders could enjoin boards from making” (Marens
and Wicks, 1999, p. 280). For example, in Aronson v. Lewis
[1984], the Court stated that ‘‘[a] cardinal precept of
[Delaware law] is that directors, rather than shareholders,
manage the business and affairs of the corporation”. The
‘‘business judgment rule” makes legal enforcement of max-
imizing shareholder value virtually legally unenforceable.
6
In the US, for example, in 1999, after 12 attempts over 25 years, the
1933 Glass-Steagall Act which, based on the experience of the earlier great
‘Wall Street Crash’, had prohibited commercial banks from ‘‘underwriting,
holding or dealing in corporate securities, either directly or through
securities af?liates” was revoked. In particular,Section 20 of the Act ordered
that ‘‘no member bank could be af?liated with anycorporation, association
or business trust engaged principally in the issue, ?otation,underwriting,
public sale, or distribution at wholesale or retail through syndicate
participation of stocks, bonds, debentures, notes or other securities” was
replaced by the Gramm–Leach–Bliley Financial Services Modernization Act
which removed these ?rewalls. Amongst other effects, this allowed retail
banks to engage in far riskier activities by levering up their bets, greatly
increasing their vulnerability to illiquidity and helping to fuel the massive
growth in exotic ?nancial ‘innovations’. The 1999 act also removed the
1956 Bank Holding Company Act’s separation of commercial banking and
insurance business. In 2000 the Commodity Futures Modernization Act which
shielded the market for derivatives from federal regulation became law
(Akhigbe and Whyte, 2004; Canova, 2008; Kuttner, 2007). The Economist
(1999), lauding the abolition of the act, stated that: ‘‘Glass–Steagall was a
lousy law from day one ... accusations of disreputable practices and
dishonest dealings made against the banks [are] not supported by any
compelling evidence”. For a similar view see Benston (1990). Since 1993
European Union Second Banking Directive had already removed restrictions
on retail banks engaging in ‘‘investment” activities (Benink and Benston,
2005).
7
This may be an underestimate as determining the size of hedge funds is
dif?cult because of the privacy which lack of regulation allows them. The
majority of hedge funds are domiciled off-shore for tax avoidance, and
other purposes, in the Cayman Islands. The next most popular registration
locations are the British Virgin Islands and Bahamas. About two-thirds of
onshore hedge funds are registered in the US state of Delaware (Interna-
tional Financial Services London, 2008).
B. McSweeney / Accounting, Organizations and Society 34 (2009) 835–848 839
Although it was not a legal requirement, the context be-
came much more favourable to maximizing shareholder
value from a period around the early 1980s. Increased
pressures and demands were in part driven and legiti-
mated by highly contestable analyses, including inaccurate
de?nitions of property rights
8
(Grant, 1996; Sternberg,
1994), and on partial and ahistorical data (Bughin and
Copeland, 1997; Hansmann & Kraakman, 2001) – such that
it became so widely accepted that many accounting, man-
agement (and other) textbooks simply assert, rather than ar-
gue for it (Bainbridge, 2006; Sundram & Inkpen, 2004).
According to Hansmann and Kraakman, writing in 2001,
‘‘the triumph of the shareholder-orientated model of the
corporation over its principal competitors is now assured”.
The corner-stone of this theory is that as ?nancial mar-
kets always accurately value corporations, then focusing
the activities of corporations towards maximizing valua-
tion by ?nancial markets is the most effective form of ‘cor-
porate governance’. For the current crisis, this narrowing of
corporate purpose had a two-fold impact. It greatly
encouraged speculative activity in ?nancial markets but
it also misdirected corporations such that they were in a
particularly vulnerable condition when the bubble(s)
burst. How did this happen?
Demands for share price growth, and relatedly large
dividend payments (and/or share buybacks to boost share
prices) encouraged corporations to increasingly rely on
external funds, rather than retained pro?ts, so their debt
ratios grew along with their vulnerability to a credit
crunch. Corporations were urged to rely on debt rather
than internal funds. This was seen as yet another means
to force companies to ‘‘disgorge” cash into ?nancial mar-
kets (Jensen, 1989, p. 11). Managers were urged to ‘‘lever-
age [their] company to the hilt” as they should not ‘‘turn
their backs on opportunities for shareholder value offered
by the easier availability of debt” (Bhide, 1988, p. x). But
as Alan Greenspan has observed: ‘‘Highly leveraged insti-
tutions . . . are by their nature periodically subject to seiz-
ing up as dif?culties in funding leverage inevitably arise”
(1999). The emphasis on disgorging cash and the conse-
quent increase in debt made banks even more central to
economic activity (Boyer, 2007) and thus also increased
the adverse consequences of the ‘credit-crunch’. Not every
company de-emphasized ‘‘retain-and-reinvest”, but many
did and the degree of pressure and incentives to do so var-
ied between and within countries (O’Sullivan, 2000).
The desire for cash to feed ?nancial markets drove
extensive and persistent efforts to identify so-called ‘free
cash ?ow’ through downsizing, de-layering, re-engineer-
ing, re-structuring, and other actions (Gaddis, 1997; Ken,
1997; Morin & Jarrell, 2001; Richardson, 2006). Free cash
not distributed to shareholders was said to be inef?ciently
used, to be wasteful. ‘‘For a company to operate ef?ciently
and maximize value, free cash ?ow must be distributed to
shareholders” (Jensen, 1989, p. 9). But often free cash ?ow
cannot be readily distinguished from what is vital or
enhancing. As Geroski and Gregg state: ‘‘it is very dif?cult
to be sure whether overheads are ‘fat’ or ‘muscle’, particu-
larly when some support services have subtle and poten-
tially long-run effects on corporate performance” (1997,
p. 14). Identifying ‘free’ cash ?ow requires unavailable
knowledge about the future. To take an example, even if
employees, say, are de?ned solely as an economic resource
of, not stakeholders in, a corporation, would building
affordable housing for some employees be a ‘waste’ of
money which otherwise could have gone to shareholders
(or top management), or would it increase morale and pro-
ductivity thereby earning even greater cash?
Relying on the contestable notion that a corporation’s
sole responsibility is to its shareholders and on an imprac-
tical view of analytical capability, Jensen, in a highly in?u-
ential article, argued that a corporation should only invest
in ‘‘projects that have positive net present values when dis-
counted at the relevant cost of capital” (1986, p. 323). With
less precision Friedman had already stated that: ‘‘there is
one and only one social responsibility of business and that
is to make as much money for shareholders as possible”
(1970). A range of certainty-assuming calculative
techniques explicitly claiming to increase shareholder va-
lue – generically called ‘value based management, with
proprietary names, such as Economic Value Added (EVA),
Total Business Return, Cash Flow Return on Investment,
Economic Value Management, and Discounted Economic
Pro?ts were widely promoted by consultancy ?rms, partic-
ularly, but not exclusively ?rms part of or closely linked
with professional accounting ?rms, lauded by some aca-
demics, and acquired by a signi?cant number of corpora-
tions. EVA, said Fortune (1993), is ‘‘the real key to
creating wealth ... it drives stock prices”. Within the notion
of value based management, the achievement of ‘value’ by
a corporation is con?ated with a speci?c and narrower no-
tion of ‘value’, namely wealth for shareholders.
Promotion of value based management schemes have
featured in both professional and academic accounting
journals (Ittner & Larcker, 2001) but it was not an area
for which accounting practitioners or academics were able
to claim a monopoly of knowledge. Eulogies, often quite
strident, were also published in engineering, ?nance, mar-
keting, logistics, strategy, and other journals (Christopher
& Ryals, 1999; Grant, 2002; Simms, 2001). The evidence
in these papers is usually thin. Mere deductions from a
priori belief and/or invalid generalizations from single
cases – themselves of questionable quality – are particu-
larly common. Although inconceivable without, and exten-
sively reliant on, accounting calculations, many of the
eulogies of one or other value based management schemes
distinguish themselves from what is often termed ‘conven-
tional’ or ‘traditional’ accounting. But wherever the eulo-
gies appear, they are usually built on a common story:
maximizing shareholder value should be the exclusive goal
of corporations; that goal bene?ts everyone; the best way
8
The property rights argument for shareholder primacy is that as a
corporation ‘‘belongs” to its shareholders it should be run in a way that
maximizes the bene?ts for its shareholders. Even if it supposed that a
corporation is owned by its shareholders that would not exclude the rights
of others, including, but not exclusively, those of bond holders (Black and
Scholes, 1973). Property has legal (and moral) responsibilities, not just
rights. But in any event, shareholders do not own a corporation. Rather they
own a type of corporate security called ‘‘stock” or ‘‘shares” which gives
them some, but not absolute, control over a corporation. For example,
shareholders do not the right to exercise control over acorporation’s assets
(Stout, 2007).
840 B. McSweeney / Accounting, Organizations and Society 34 (2009) 835–848
to achieve that goal is through the use of one or other value
based management calculating schemes in which dis-
counted cash ?ow is usually central; performance mea-
surement and incentive plans should be aligned and
integrated with value based management. As a conse-
quence, it is asserted that: ef?ciency is improved; value
adding processes are ampli?ed and readily distinguishable
from non-value adding schemes; free-cash ?ow is identi-
?ed which should be distributed to shareholders; and mar-
ket capitalization rises (Ameels, Bruggeman, & Scheipers,
2002).
Like just about every other fashionable management
scheme, value based management approaches are said to
achieve comprehensive knowledge of the casual links be-
tween organizational activities and the resulting outcomes.
Like some such schemes (although not all of them) that
knowledge, in value based management approaches, is
said to be acquired by multiple and minute accounting cal-
culations. The novelty of value based management
schemes was the centrality given to the goal of maximizing
shareholder value (rather than earnings/pro?t)(Ittner &
Larcker, 2001) and that this was achievable through calcu-
lating and acting to ensure that all micro-management
processes were effectively aimed at achieving that goal
(Condon & Goldstein, 1998; Grant Thornton, 2008; KPMG,
2009; Stern, Stewart, & Chew, 1995). Disagreements be-
tween the proponents of different varieties of value based
management schemes largely focused on what were the
appropriate accounting calculations and adjustments – they
made common claims about the goal of such processes:
maximizing shareholder value by making it the aim of
every corporate action.
But it is overwhelmingly impossible in advance, and
very often in retrospect, to have such knowledge, including
identifying a causal link between a micro-level decision/
action (‘‘value driver”) within a corporation and ultimately
shareholder value. This is evident both from the conceptual
defects in the notion of accurately calculating the dis-
counted cash ?ow of corporate projects – this can only
be done in the very rare circumstances of no uncertainty
– and also from empirical evidence. In fact, just about
every study of the application of discounted cash ?ow
techniques within organizations points to the absurdity
of seeking to side-line complexity and uncertainty (Bower,
1972). The complex issue of, say, managing and motivating
divisional performance, of identifying synergies between
them, is not, as Zimmerman (2005) observes, captured by
value based management calculations. It is contestable
whether maximizing shareholder value should be the main
corporate goal but in any event independent studies – that
is analysis not undertaken by value based management
advocates – of the degree of correlation of EVA (and other
variants) with the absolute level of changes in stock mar-
ket valuations of companies ?nd it is at best miniscule
and often negative (Biddle, Bowen, & Wallace, 1997). For
instance, a study of 582 US companies found a correlation
in only 18 companies. In 210 companies the correlation
was negative (Fernádez, 2003). Even if the results had been
otherwise, namely that a strong statistical relationship had
been demonstrated, this would not be valid evidence that
economic value measures are better, indeed even
appropriate, for management planning and control (Gjes-
dal, 1981). The extent to which value-based management
programmes were heavily or lightly implemented varied
(Francis & Minchington, 2002), but there were real effects.
The supposition of certainty in these programmes discour-
aged innovation – a profoundly uncertain process
(Schilling & Hill, 1998). Wasteful investments were
avoided but so too were productive ones. More corporate
time was committed to satisfying ?nancial markets with
consequent reductions on attention to product and service
markets (Dodd & Johns, 1999).
9
Value based management schemes were part of a much
wider and persistent search for cash extraction. CEOs ben-
e?ted. In the US in 1980 average CEO pay was 42 times that
of the average worker, in 2006 it had rocketed to 364 times
(AFL-CIO, 2009). And yet several studies have shown that
in corporations the greater the pay disparity: the weaker
the ?nancial performance; the poorer internal collabora-
tion; and the lower product quality (Cowherd & Levine,
1992; Siegel & Hambrick, 2005, for instance). However,
legitimating greater pay disparity has given rise to an
extensive literature and a wide array of university courses
signi?cantly overvaluing the role of CEOs as leaders
(Khurana, 2002).
But what happened to the cash ‘‘disgorged” into ?nan-
cial markets? Participants in ?nancial markets are usually
referred to as ‘investors’. This implies that they are provid-
ing investment funds for corporations and thus have a vital
role in resource allocation. The notion that shareholders
‘investments’ are investment funds for corporations is
reinforced in the description by corporations, the media,
and others of various payments to shareholders such as
dividends and share buybacks as: ‘‘giving back sharehold-
ers their money”, ‘‘returning cash to shareholders”, ‘‘hand-
ing-back investment to shareholders” (Rappaport &
Maubossin, 2001). But that cash does not come from the
shareholders. In fact, shareholders are overall at most a
miniscule source of funding for corporations (Ravesncroft
and Williams, 2004; O’Sullivan, 2000).
10
The investment
by shareholders in their own assets through purchase of
shares from other shareholders (secondary market trading)
is confused with investment in a corporation (primary mar-
ket). Only a miniscule quantity of shares traded is new
investment, overwhelmingly it is trade of shares in an old
investment. In bull markets trading temporarily seems to
boost economic growth simply by increasing activity in
the market and increasing speculation. But the accumulation
of private ?nancial assets through ?nancial markets does not
lead to ?nance being channelled into productive activities.
The error of assuming that old investment is new invest-
ment remarkably has misinformed a signi?cant ?nancial
market failure denying literature (see Shleifer & Vishny,
1997, for instance).
9
For criticism of EVA by two professors of accounting, but from quite
different perspectives, see Mouritsen (1998) and Zimmerman (2005).
10
Between 1970 and 1994 new shares contributed: +1%; +3.5%; À4.6%;
and À7.6% of total new funding of the non-?nancial sectors in Germany,
Japan, United Kingdom and the United States, respectively (Corbett &
Jenkinson, 1997). See also Ellsworth (2002) and O’Sullivan (2000).
B. McSweeney / Accounting, Organizations and Society 34 (2009) 835–848 841
Increasingly, ?nancial assets came to have, as it were, a
life of their own. What occurred was what a number of
commentators have called ‘‘?nancialization”: a ‘‘shift in
the internal social relationships within states in favour of
creditor and retainer interests, with the subordination of
productive sectors to ?nancial sectors” (Gowan, 1999, p.
vii). Krippner de?nes ‘‘?nancialization” as ‘‘a pattern of
accumulation in which pro?ts accrue primarily through
?nancial channels rather than through trade and commod-
ity production” (2005, p. 174) (see also: Froud, Johal, Lea-
ver, & Williams, 2006; Orhangazi, 2007). In 1980, world
nominal gross domestic product and the value of world
?nancial stocks were about the same size, by 2006 the lat-
ter had become three and a half times larger than the for-
mer (Huffschmid, 2008). Combined with an explosion of
volume and value of trading on ?nancial markets has been
the proliferation of new ?nancial ‘instruments’ (Felix,
1998; Krippner, 2005). Central to conception and develop-
ment of these instruments was ?nance research in aca-
demic institutions (Hopwood, 2007).
The enduring dominance of ?nancial market denial in
that discipline contributed to the underestimation of the
additional risks created through processes often described
in a sanitized way as ?nancial ‘engineering’ or ‘innovation’.
As virtually all of the ‘investment’ activity in ?nancial mar-
kets was not investment in productive activities, what
emerged was in effect a giant global casino, albeit less reg-
ulated than most casinos, and with profound conse-
quences. As signi?cant speculative bubbles are not
conceivable by ?nancial market failure denying theories,
the general rise in market valuations created an illusion
that the increasing values wholly re?ected improved cor-
porate achievements and prospects. Gambling begat more
gambling. Institutional shareholders who did not partici-
pate enthusiastically often got ‘‘the cold shoulder” from
pension funds and others (Thrift, 2001). As Keynes said
about long-term investors ‘‘[if] he is successful, that will
only con?rm the general belief in his rashness; and if in
the short run he is unsuccessful, which is very likely, he
will receive no mercy. Worldy wisdom teaches us that it
is better for reputation to fail conventionally than to suc-
ceed unconventionally” (1936, 158-9). John C. Boogle ob-
serves that ‘‘any system whose revenue depends upon
persuading investors to trade actively is, by de?nition,
going to focus on short-term speculation” (Boogle &
Sullivan, 2009, p. 22). Maximizing shareholder value, a
massively in?uential idea, instead of being a ‘‘virtuous cy-
cle” (Bughin & Copeland, 1997) turned out to be a driver of
a vicious speculative cycle.
Intertemporal consumption failure
Over powerful ?nancial markets enable and induce both top
management and ?nancial market participants to behave
myopically
A speci?c dilemma for ?nancial markets is the balance
between short-term cash extractions from a corporation
against that corporation’s longer term investment require-
ments. Market failure occurs when a non-optimal balance
between these different temporal orientations is not at-
tained. By supposing that ?nancial markets are not myopic
(Jensen, 1986; cf. Fuller & Jensen, 2002), ?nancial market
denial asserts that those markets either constrain corpora-
tions from sacri?cing the longer-term through short-term
focused but ultimately detrimental actions (such as costly
in?ations of the current bottom line or excessive dividend
payments) or punish those few who brie?y succeed. In that
model, ?nancial market pressure on corporations seeks
only to eliminate undesirable investments and preserve
and encourage worthy ones.
Shareholders: This notion of ?nancial markets supposes
that shareholders are committed to the longer term. Wil-
liamson states that they ‘‘invest for the life of a ?rm”
(1985, p. 304). But this relies on a ?ctional characterization
of shareholders as a group which collectively shares that
commitment. Even if it is supposed that each individual
shareholder has stable preferences regardless of time or
context (a depiction which is not necessarily correct)
shareholders in general have diverse and con?icting inter-
ests and preferences based on their differing attitudes,
preferences, risk aversions, liquidity desires and needs, de-
grees of portfolio spread, and life circumstances (Crespi,
2007). Shareholders relationships with a speci?c corpora-
tion may be very brief, and for many it often is. Each differ-
ent generic conception of shareholders requires a different
time-horizon to avoid market failure. The heterogeneous
composition of shareholders debars an optimum frame-
work and thus market failure is inevitable.
Even shareholders with a longer-term horizon have an
incentive to seek short-term bene?ts from a corporation
even if it is potentially detrimental to the corporation in
the longer-term (through reduced investment and thus
lower future dividend paying ability) as they have no guar-
antee that the corporation will actually invest suf?cient of
the higher retained pro?ts/cash, or do so effectively, so as
to bring about a future increase in dividend payments.
The temporal in?uence of ?nancial markets on corpora-
tions is conditioned by the speci?cs of national institu-
tional settings and structures, albeit these are not
deterministic and do not affect each company within the
same country equally. In contexts which readily enable
hostile takeovers, for instance, the incentive to invest for
the longer-term is reduced. The constraint placed upon
investment is that distributed pro?ts/cash-?ow must be
suf?cient to satisfy shareholders’ demands and, moreover,
high enough to ensure a strong share price which will dis-
courage any attempt to take over the corporation (Dicker-
son, Gibson, & Tsakalotos, 1995).
Chief Executive Of?cers: Intertemporal consumption
problems with uncertain future gains also adversely affect
the behaviour of corporate chief executive of?cers (CEO)
and of other top management. Even in the absence of stock
market based remuneration schemes, and most especially
in deregulated contexts, CEOs have an incentive to empha-
sise the short-term because: (a) they can be certain about
remuneration they currently take but uncertain about fu-
ture remuneration; (b) in the short-term they are in
control (notwithstanding the role of remuneration/com-
pensation committees, which is largely cosmetic)
(Bebchuk and Fried, 2004); and (c) in the longer term,
842 B. McSweeney / Accounting, Organizations and Society 34 (2009) 835–848
given the normal age of appointment to CEO positions,
they are retired (Dechow & Sloan, 1991).
But the greatly increased use of stock option schemes
linking CEO, and other top management, remuneration
11
with ?nancial markets valuation of corporate stock has fur-
ther intensi?ed this short-term bias (Bolton, Scheinkman, &
Xiong, 2006). As a practice, stock market incentive schemes
for top management which began in the US, came to domi-
nate remuneration at that level in Anglo-American countries
(Barron and Waddell, 2003) and also spread elsewhere albeit
not always as extensively. Legislative changes in 1998 in
Germany, for instance, signi?cantly facilitated the imple-
mentation of stock option plans (Langmann, 2007). In
1980 stock options accounted for 19% of CEO remuneration
in large United States corporations but it had risen to about
49% by 2000 (Lazonick, 2007). Anecdotal evidence strongly
suggests that it has continued to rise further since then.
The logic of this ‘agency cost’ view of corporate gover-
nance is that without such incentives top management
are opportunistic (line their own pockets), risk adverse
(hoard excessive cash or near-cash), empire or prestige
builders, and/or reckless. These managerial activities are
variously described as: ‘shirking’, ‘opportunism’, ‘moral
hazards’, ‘vanity projects’, ‘tunnelling’, and ‘self-dealing’
(Djankov, La Porta, Lopez-de-Silanes, & Shleifer, 2008). Di-
rectly linking signi?cant portions of the payments (usually
euphemistically called ‘compensation’) of top management
with ?nancial markets is supposed to channel them ‘‘away
from extracting opportunistic rent and towards maximiz-
ing shareholder value” (Devers, Cannella, Reilly, & Yoder,
2007, p. 1025). ‘Excess’ cash, for instance, could, it was ar-
gued, be more ef?ciently reallocated by ?nancial markets
which would reallocate it to more productive purposes.
The aim is ‘‘to motivate managers to disgorge the cash
[to shareholders] rather than investing it at below cost or
wasting it in organizational ef?ciencies” (Jensen, 1986, p.
33). Amongst other things, this eulogy of ?nancial markets
ignores the fact that available evidence suggests that cor-
porations which are not controlled by ?nancial markets
performed at least as well as those which are (Fligstein &
Choo, 2005) and relies on the normative justi?cation of
favouring shareholders interests, at the expense of other
stakeholders.
What impact have these plans had on corporate perfor-
mance and behaviour and what have been the conse-
quences for ?nancial market failure potential?
Performance: Identifying the relationship(s) between
CEO (and other top management) remuneration (widely
de?ned) and corporate performance is rather elusive as
corporate performance is multifaceted and not just a con-
sequence of top management decisions (Devers et al.,
2007; Larcker, Richardson, & Tuna, 2007; McGahan & Por-
ter, 1997; Pfeffer & Sutton, 2006; Yermack, 1997). It is also
created by the actions of others within and outside corpo-
rations and by circumstances beyond the control of top
management. Based on a review of 220 studies, Dalton,
Daily, Certo, and Roengpitya (2003) found ‘‘few examples
of systematic relationships” between stock ownership
and corporate performance. A meta-analysis of 137 CEO
remuneration studies found that ?rm performance ac-
counted for less than 5% of the variance in CEO remunera-
tion (Tosi, Werner, Katz, & Gomez-Mejia, 2000). In 2007
average pay of top management of US public companies in-
creased by 20.5% over 2006 earnings, but in the same per-
iod those corporations’ pro?ts had, on average, increased
by only 2.8% (AFL-CIO, 2009). Froud et al. (2006) conclude
that ‘‘top managers . . . appear to be an averagely ineffec-
tual of?cer class who do, however, know how to look after
themselves.” Stock options, Yermack (1995) states, have
often ironically been ‘‘not so much an incentive device
but a covert mechanism of self-dealing”, the very process
they were supposed to eliminate.
Behaviour: The general effect of stock market based
incentive schemes has been to encourage short-term fo-
cused corporate decisions. Bryan, Hwang, and Lillien
(2000) conclude that stock options are likely to exacerbate
CEO’s unwillingness to undertake longer-term investment
projects. Both Bloom and Milkovich (1998) and Coles, Dan-
iel, and Naveen (2006) found that the more the proportion
of CEO remuneration is dependent on ?nancial market val-
uation, the higher the corporations’ leverage and the risk-
ier their investments. Coles, Hertzel, and Kalpathy (2006),
also found that ?nancial market based incentives encour-
age an emphasis on short-term stock market valuation at
the expense of long-term corporate value. Sanders and
Carpenter (2003) found that these schemes motivate top
management to redirect funds away from long-term
investments towards stock repurchases. In 2005 Alan
Greenspan in testimony to the US Federal Reserve Board
observed that despite an exceptional rise in pro?ts and
cash ?ow, investment lagged far behind echoing the same
con?guration last seen in a deep recession in 1975. Many
studies have found that stock incentives lead to accounting
information manipulation: variously described as ‘earnings
management’, ‘creative accounting’, and ‘cosmetic
accounting’ (Aboody & Kasznik, 2000; Burns & Kedia,
2005; Cheng & War?eld, 2005; Matsumoto, 2002; Myers,
Myers, & Skinner, 2007, for instance).
Stock options have in the main encouraged, and been
encouraged by, speculative activity in ?nancial markets
and increased the vulnerability to the credit crunch of
those companies which through pressure and/or choice
emphasized the ‘‘disgorging” of cash. They have intensi?ed
management focus onto pleasing, and at times manipulat-
ing, ?nancial markets. Inevitably this has diverted atten-
tion away from where real value is created – product
markets (Ellsworth, 2002, 1983; Fuller & Jensen, 2002;
Graham, Harvey, & Rajgopal, 2005; Stinchcombe, 2000).
The short-termspeculative orientation of many CEOs when
combined with the short-term and speculative orientation
of shareholders mutually reinforce each other.
Many factors have contributed to the liquidity problems
currently being experienced by many corporations, not
least more restricted lending by banks. However, but years
11
CEO and top management remuneration in addition to a ?xed amount
of pay may include: short-term bonuses, deferred retirement bonuses,
stockholdings, stock bonuses, stock options, dividend units, phantom
shares, pension bene?ts, saving plan contributions, and other items such
as loans at below market rate. The most important item in terms of
monetary gains, and the most controversial, is stock options (Constanti-
nides, Harris, & Stulz, 2003).
B. McSweeney / Accounting, Organizations and Society 34 (2009) 835–848 843
of excessive payouts, especially in shareholder value dom-
inated economies, where so much cash has been disgorged
to satisfy the short-term demands of ?nancial markets cre-
ated an over-reliance on borrowings rather than retained
pro?ts for investment funds. In the 1970s, dividend pay-
outs of US corporations averaged 41.3%, by 2007 they
had increased to 66.2% (US Congress, 2009, Table B-90),
but as share buybacks have also increased substantially
the effective ‘‘disgorging” of cash by companies has been
even greater.
12
The payout ratio in the UK has been even
higher. Between 1990 and 2004, the UK had higher maxi-
mum, minimum, mean, and median payout ratios than the
US (ap Gwilym, Seaton, Suddason, & Thomas, 2006).
Amongst other major economies, the payout ratios were
the lowest in Germany, Japan, and Switzerland. The false
justi?cation for this increased cash ?ow into ?nancial mar-
kets is that these markets perform a vital resource (re)allo-
cation role by identifying and investing in activities which
have the best productive prospects. But as we have seen,
cash is not recycled back into productive activities. This
has been a major reason for the increase corporate leverage,
and as a consequence vulnerability to credit famine, and for
the immense and almost continuous redistribution of in-
come and wealth to the rich since the 1980s (Offer, 2006;
Toynbee & Walker, 2008; US Congress Joint Economic Com-
mittee, 2008). To enable this, the incomes of the non-elite
have been constrained forcing ever more reliance on per-
sonal debt (Khoman & Weale, 2008)
13
and this inequality
breeds instability (Keynes, 1936).
National institutional contexts shape the level of, and
changes in, retention rates. German corporations, for in-
stance, pay out a lower portion of their cash ?ows than
UK corporations (Andres, Betzer, Goergen, & Rennebog,
forthcoming). Low retention rates have contributed to
market failure in three ways. First, by encouraging and
facilitating greater market speculation. Secondly, by
increasing corporate vulnerability to a credit crunch.
Thirdly, by driving-up personal debt. In the ‘developed
world’ countries which on average have lower retention
rates also have higher levels of personal debt. These also
are the countries which a range of organizations predict
will be most badly affected by the downturn and which
will be slowest to recover (European Commission, 2008;
International Monetary Fund, 2008; Organization for Eco-
nomic Cooperation, 2008).
Concluding remarks
Extensive ?nancial market failure precipitated and con-
tinues to perpetuate widescale economic and social prob-
lems. This paper has sought to contribute to our
understanding of the causes of that failure by examining
three key failure-enabling properties of ?nancial markets.
Both denial and recognition of these properties can be
found within the accounting literature.
Accounting has not been an innocent activity. It rein-
forced the illusion of continuous growth and helped fuel
speculation by importing up-ward spiralling asset valua-
tions into balance sheets and then exporting those valua-
tions via the multiple processes in which accounting is
in?uential. In addition to contributing to the growth of
over-blown and unsustainable optimism, accounting also
played a part in increasing corporate vulnerability to the
downturn by overstating the capital adequacy of many
?nancial institutions and by facilitating and legitimating
excessive cash pay-outs from corporations. These adverse
consequences are not inherent qualities or inevitable con-
sequences of accounting. But accounting – when shaped,
employed, and analysed in ways which rely on ?nancial
market failure denial – reinforced the conditions which
created the crisis.
For decades ?nancial market failure denial has become
the root of inter-governmental policies and actions and
many national governments. Financial markets were
increasingly and extensively liberalised almost every-
where. Market failure denial is an idea which periodically
re-emerges to dominate political meta-narratives and pol-
icies. The most recent phase began around the 1980s, ?rst
in Anglo-American countries, but increasingly it spread,
with varying degrees of intensity around the world. Yet
again, as a description of the capabilities and effects of
?nancial markets it has proven to be wildly wrong and
constitutive of a reality it claimed would not happen.
Shifting the balance of governmental and corporate pol-
icy towards capital, and ?nance capital in particular, was
justi?ed on the grounds that everyone would bene?t. The
record shows that this was not the result (Brewster,
Muriel, Phillips, & Sibieta, 2008). It was also justi?ed on a
particularly narrow de?nition of the property rights of
shareholders (Stout, 2007). Elaine Sternberg, for instance,
stridently asserted that using the resources of a corpora-
tion for anything other than in the interests of sharehold-
ers is ‘‘theft: an unjusti?ed appropriation of the owners’
property . . . That the diverted resources are applied to ends
which are commonly regarded as laudable . . . does not
make the act of diverting them any less larcenous” (1994,
p. 41). But clearly there are other ways of looking at this.
The consequences for many others are already and will
continue to be catastrophic. Furthermore, a weakening of
speculative con?dence in ?nancial markets or of the supply
of credit may cause economic collapse. Indeed, the current
crisis is a product of both combined. But as Keynes (1936,
p. 158) observed about the last great crash, increasing
credit availability (towards which much governmental
activity is currently directed) though a necessary condition
for recovery, is not a suf?cient condition.
Intellectual errors of monumental proportions have
been made as a result of denial of the possibility of ?nan-
cial market failure. The academic literature is peppered
with many examples of warnings about the dangers of
?nancial market failure denial. But this was ignored. On
the other hand there is an extensive academic, including
accounting, literature which encouraged excessive and
inappropriate de-regulation and was insuf?ciently alert
12
In 2006 the world’s biggest 600 companies bought back shares with the
value equivalent of 78% of the dividends they paid in the same year
(Financial Times, March 26, 2007).
13
Absolute levels and increases in that ratio vary between countries.
Within Europe, for instance it is particularly high in Ireland, Spain and the
UK, but comparatively lower in Germany and France (Khoman and Weale,
2008).
844 B. McSweeney / Accounting, Organizations and Society 34 (2009) 835–848
to the speculative characteristics of ?nancial markets.
Inappropriate regulations can have detrimental
consequences, but acknowledgement of regulatory failure
does not require denial of market failure. And yet this de-
nial shaped many actions towards, and within, ?nancial
markets. To paraphrase Keynes, governments believing
themselves to be quite exempt from academic in?uence
were usually the slaves of mistaken academics. Much of
that literature is technically sophisticated but illustrative
that even remorseless logic, if it is premised with a mis-
take, can end up promoting grave policy errors.
What can we learn about the genesis of the current eco-
nomic crisis from the accounting literature? There are
some considerable insights. Just some examples are cited
above. But overwhelmingly the literature is detached or
is overly narrowly focused. Accounting is fragmented into
a number of relatively autonomous communities with a
high degree of internal consensus and self-referentiality
(Hopwood, 2007)
14
. A knowledge community has been built
around market ef?ciency fundamentalism and achieved a
scholarly identity, indeed almost paradigmatic status, in
some leading peer reviewed accounting journals. The con-
sensus within that community and the embeddedness of
the model have created defenses against the impact of cri-
tiques and a parochialism distrustful of wider perspectives
and an unwillingness to explore wider economic and social
characteristics and consequences of ?nancial markets more
robustly.
Disregard or prede?nition of the contexts dominates
accounting research in general, not just studies engaged
with matters pertinent to the economic crisis. Valid an-
swers to big questions depend on context. Context informs
understandings built into the questions; the evidence
available for answering the questions; the actual multi-
layered operation of the processes within contexts; and
the constitution of, and changes in, those contexts. At one
extreme in accounting research is a lack of curiosity – a
parochial and disengaged preoccupation with the tech-
niques and regulatory rules of accounting per se detached
from the contingent circumstances and consequences of
use. The opaqueness of those techniques and rules to many
‘outsiders’ provides an occupational barrier to entry – it
helps defend a research career space, a regulatory space,
or an occupational space – but that barrier also curtails
explorations into deeper and wider contexts which shape
accounting’s consequences. It discourages openness, a will-
ingness and ability to learn from and employ the insights
of other disciplines. At the other extreme is an a priori be-
lief in the muni?cent bene?ts of accounting calculations
within ?nancial markets and every other location.
Although such research is apparently focused on conse-
quences, these are narrowly de?ned and there is a neglect
of the much more complex processes in which accounting
is often enmeshed in ?nancial markets and elsewhere.
Will the economic crisis strengthen and expand contex-
tually engaged accounting research? Or will the extremes
of disinterest in contextual consequences and that of an
overly narrow and romanticised view of the inevitability
of positive accounting consequences continue to dominate,
remaining resistant to critique and overt changes in eco-
nomic conditions? That depends on the courage of
accounting researchers.
Acknowledgements
The comments of Anthony Hopwood, Sheila Duncan,
Romano Dyerson, Howard Gospel are gratefully
acknowledged.
References
Aboody, D., & Kasznik, R. (2000). CEO stock option awards and corporate
voluntary disclosures available at: .
AFL-CIO (2009). (2007). Trends in CEO Pay available at: .
Akhigbe, A., & Whyte, A. M. (2004). The Gramm–Leach–Bliley Act of 1999:
Risk implications for the ?nancial services industry. The Journal of
Financial Risk, XXVII(3), 435–446.
Ameels, A., Bruggeman, W., & Scheipers, G. (2002). Value-based
management control processes to creative value through integration: A
literature review. Working Paper, Vlerick Leuven Gent School of
Management.
Allen, B. (1981). Generic existence of equilibria for economies with
uncertainty when prices convey information. Econometrica, 49,
1173–1199.
Allen, D. (1994). Strategic ?nancial decisions: A guide to the evaluation and
monitoring of business strategy. London: Kogan Page.
Andres, C., Betzer, A., Goergen, M., & Renneboog, L. (2009). Dividend
policy of German ?rms: A panel data analysis of partial adjustment
models. Journal of Empirical Finance, 16.2, 175–187.
ap Gwilym, O., Seaton, J., Suddason, K., & Thomas, S. (2006). International
evidence on the payout ratio, earnings, dividends, and returns.
Financial Analysts Journal, 62(1), 36–53.
Arthur, T. (2000). Is the stock exchange a casino? Economic Affairs, 20(4),
42–45.
Ball, R., & Bartov, E. (1996). How naive is the stock market’s use of
earnings information? Journal of Accounting and Economics, 21(3),
319–337.
Bainbridge, S. M. (2006). Director primacy and shareholder
disempowerment. Harvard Law Review, 119(6), 1735–1758.
Barron, J. M., & Waddell, G. R. (2003). Executive rank, pay and project
selection. Journal of Financial Economics, 67(2), 305–349.
Barrell, R., Hurst, I., & Kirby, S. (2008). Financial crises, regulation
and growth. National Institute for Economic Review, 206(1),
56–65.
Bator, F. M. (1958). The anatomy of market failure. The Quarterly Journal of
Economics, 72(3), 351–379.
Beaver, W. (1968). The information content of annual earnings
announcements. Journal of Accounting Research(Suppl. 6), 67–92.
Bebchuk, L., & Fried, L. (2004). Pay without performance: The unful?lled
promise of executive compensation. London: Harvard University Press.
Benink, H., & Benston, G. (2005). The future of banking regulation in
developed countries lessons from and for Europe. Financial Markets,
Institutions & Instruments, 14(5), 289–328.
Benston, G. J. (1989). The federal ‘‘safety net” and the repeal of the Glass–
Steagall act’s separation of commercial and investment banking.
Journal of Financial Services Research, 2, 287–305.
Benston, G. J. (1990). The separation of commercial and investment banking.
Oxford: Oxford University Press.
Berle, A. A., & Means, G. C. (1932). The modern corporation and private
property. New York, NY: Macmillan.
Bhide, A. (1988). Why not leverage your company to the hilt? Harvard
Business Review, 66(3), 92–98.
Biddle, G. C., Bowen, R. M., & Wallace, J. S. (1999). Evidence on EVA.
Journal of Applied Corporate Finance, 12(2), 69–79.
Biehl, M., Kim, H., & Wade, M. (2006). Relationships amongst the
academic business disciplines: A multi-method citation index.
Omega, 34, 359–371.
Biondi, Y. (2007). Book review: Following the money – the Enron failure
and the state of corporate disclosure. Review of Political Economy
19(2), 281–283. Available at: .
14
For a discussion of this as a characteristic of management and business
studies more widely see: Biehl, Kim, and Wade (2006), March (2004) and
Whitley (2008).
B. McSweeney / Accounting, Organizations and Society 34 (2009) 835–848 845
Black, F., & Scholes, M. (1973). The pricing of options and corporate
liabilities. Journal of Political Economy, 81(3), 637–654.
Blair, A. (2008). Costs and charges in unit trusts. London: Royal Society of
Arts.
Bloom, M., & Milkovich, G. T. (1998). Relationships among risk, incentive
pay, and organizational performance. Academy of Management Journal,
41(3), 25–40.
Bolton, P., Scheinkman, J., & Xiong, W. (2006). Executive compensation
and short-termist behaviour in speculative markets. Review of
Economic Studies, 73, 577–610.
Boogle, J. C., & Sullivan, R. N. (2009). Markets in crisis. Financial Analysts
Journal, 65(1), 17–24.
Bower, J. L. (1972). Managing the resource allocation process. Homewood,
IL: Richard D. Irwin.
Boyer, R. (2007). Assessing the impact of fair value upon ?nancial crises.
Socio-Economic Review, 5, 770–807.
Brewster, M., Muriel, A., Phillips, D., & Sibieta, L. (2008). Poverty and
inequality in the UK: 2008. London: The Institute for Fiscal Studies.
Brown, G. (2000). Speech to the Labour Party conference, 25 September.
Available at: .
Bryan, S., Hwang, L. S., & Lilien, S. (2000). CEO stock-based compensation:
An empirical analysis of incentive-intensity, relative mix, and
economic determinants. Journal of Business and Society, 73(1),
661–693.
Bruner, R. F., & Carr, S. (2007). Lessons from the ?nancial crisis of 1907.
Journal of Applied Corporate Finance, 19(4), 115–124.
Bughin, J., & Copeland, T. E. (1997). The virtuous cycle of shareholder
value creation. The McKinsey Quarterly, 2, 156–167.
Burns, N., & Kedia, S. (2005). The impact of performance based
compensation on misreporting. Journal of Financial Economics, 79(1),
35–67.
Campbell, K., & Limmack, R. J. (1997). Long-term over-reaction in the UK
stock market and size adjustments. Applied Financial Economics, 7(5),
537–548.
Campbell, S. D. (2005). Stock market volatility and the great moderation.
Finance and Economics Discussion Series. Federal Reserve Board,
Washington, DC.
Canova, T. A. (2008). The legacy of the Clinton Bubble, Dissent, Summer.
Available at: .
Chartered Financial Analysts’ Institute (2008). Letter to Son Excellence
Nocolas Sarkozy, le President de la Républice. Available at: .
Cheng, Q., & War?eld, T. (2005). Equity incentives and earnings
management. Accounting Review, 80(2), 441–476.
Christopher, M., & Ryals, L. (1999). Supply chain management: Its impact
on shareholder value. International Journal of Logistics Management,
10(1).
Cho, Y.-H., Lonton, O., & Whang, Y.-J. (2007). Are there Monday effects in
stock returns: A stochastic dominance approach. Journal of Empirical
Finance, 14, 736–755.
Citanna, A., & Villanacci, A. (2000). Existence and regularity of partially
revealing rational expectations equilibrium in ?nite economies.
Journal of Mathematical Economics, 34(1), 1–26.
Coles, J. L., Daniel, N. D., & Naveen, L. (2006). Managerial incentives
and risk-taking. Journal of Financial Economics, 79(2), 431–
468.
Coles, J. L., Hertzel, M., & Kalpathy, S. (2006). Earnings management
around employee stock options reissues. Journal of Accounting and
Economics, 41(1–2), 173–200.
Condon, J., & Goldstein, J. (1998). Value based management: The only way
to manage for value. Accountancy Ireland(October), 10–12.
Constantinides, G. M., Harris, M., & Stulz, R. M. (2003). Handbook of
economics of ?nance. Elsevier.
Corbett, J., & Jenkinson, T. (1997). How is investment ?nanced? A study of
Germany, Japan, the United Kingdom and the United States. The
Manchester School Supplement, 65, 69–93.
Cowen, J. A. (1988). The theory of market failure. Fairfax: George Mason
University Press.
Cowherd, D. M., & Levine, D. I. (1992). Product quality and pay equity
between lower-level employees and top management: An
investigation of distributive justice theory. Administrative Science
Quarterly, 37, 302–320.
Crespi, G. S. (2007). Maximizing the wealth of ?ctional shareholders:
Which ?ction should directors embrace? Journal of Corporation
Law(Winter), 381–427.
Crockett, A., Harris, T., Mishkin, F. S., & White, E. N. (2003). Con?icts of
interest in the ?nancial services industry: What should we do about
them? Geneva Reports on the World Economy, 5.
Crouch, C. (2008). What will follow the demise of privatized
Keynesianism? The Political Quarterly, 79(4), 476–487.
Dalton, D. R., Daily, C. M., Certo, S. T., & Roengpitya, R. (2003). Meta-
analysis of ?nancial performance and equity: Fusion and confusion?
Academy of Management Journal, 46(1), 13–27.
Dechow, P. M., & Sloan, R. G. (1991). Executive incentives and the horizon
problem: An empirical investigation. Journal of Accounting and
Economics, 14, 51–89.
Deloitte (2009). International ?nancial reporting standards in Europe.
Available at: .
Devers, C. E., Cannella, A. A., Jr., Reilly, G. P., &Yoder, M. E. (2007). Executive
compensation: A multidisciplinary review of recent developments.
Journal of Management, 33(6), 1016–1072.
Dickerson, A. P., Gibson, H. D., & Tsakalotos, E. (1995). Short-termism and
underinvestment: The in?uence of ?nancial systems. The Manchester
School, LXIII(4), 351–367.
Dodd, J. L., & Johns, J. (1999). EVA reconsidered. Business & Economic
Review(April–June), 13–18.
Djankov, S., La Porta, R., Lopez-de-Silanes, F., & Shleifer, A. (2008). The law
and economics of self-dealing. Journal of Financial Economics, 88,
430–465.
Dyckman, T. R., Downes, D. H., & Magee, R. P. (1975). Ef?cient capital
markets and accounting: A critical analysis. Englewood Cliffs: Prentice-
Hall.
Ellsworth, R. R. (1983). Capital markets and competitive decline. Harvard
Business Review(September–October), 171–183.
Ellsworth, R. R. (2002). Leading with purpose: The new corporate realities.
Stanford: Stanford University Press.
European Central Bank (2004). Fair value accounting and ?nancial stability.
Occasional Paper Series No. 13. European Central Bank.
European Commission (2008). Economic forecasts autumn 2008. Brussels:
Directorate-General for Economic and Financial Affairs European
Commission.
Ezzamel, M., Willmott, H., & Worthington, F. (2008). Manufacturing
shareholder value: The role of accounting in organizational
transformation. Accounting, Organizations and Society, 33, 107–140.
Fatemi, A., & Luft, C. (2002). Corporate risk management: Costs and
bene?ts. Global Finance Journal, 13, 29–38.
Felix, D. (1998). Asia and the crisis of ?nancial globalization. In D. Baker,
G. Epstein, & R. Pollin (Eds.), Globalization and progressive economic
policy. Cambridge: Cambridge University Press.
Fernádez, P. (2003). EVA, economic pro?t and cash value added do not
measure shareholder value creation. Journal of Applied Finance, 9(3),
74–94.
Financial Accounting Standards Board (2006). Statement of Financial
Accounting Standard No. 157: Fair Value Measurement. Norwalk, CT:
Financial Accounting Foundation. Available at: .
Financial Accounting Standards Board/International Accounting
Standards Board (2008). Outcome – Joint IASB – FASB – October 20-
21 Board Meeting. Available at: .
Financial Times (2009). Crisis exposes multiple ?aws in watchdog
framework. February 24, p. 7.
Fligstein, N., & Choo, J. (2005). Law and corporate governance. Annual
Review of Law and Social Science, 1, 61–84.
Foster, G., Olson, C., & Shevlin, T. (1984). Earnings releases, anomalies, and
the behaviour of securities returns. The Accounting Review, 59,
574–603.
Fortune (1993). The real key to creating wealth. Fortune, 20(September),
38–40.
Francis, G., & Minchington, C. (2002). Regulating shareholder value: A
case study of the introduction of value-based measures in a water
company. British Journal of Management, 13, 233–247.
French, K. R. (1980). Stock returns and the weekend effect, Journal of
Financial Economics, 8, 55–69.
Friedman, M. (1970). The social responsibility of business is to increase its
pro?ts. The New York Times Magazine, 13(September), 33.
Froud, J., Johal, S., Leaver, A., & Williams, K. (2006). Financialization and
strategy: Narrative and numbers. London: Routledge.
Fuller, J., & Jensen, M. C. (2002). Just say no to Wall Street: Putting a stop
to the earnings game: courageous CEOs are putting a stop to the
earnings game and we will all be better off for it. Journal of Applied
Corporate Finance, 14(4), 41–46.
Gaddis, P. O. (1997). Strategy under attack. Long Range Planning, 30(1),
38–45.
Gar?nkel, J. A., & Sokobin, J. (2006). Volume opinion divergence, and
returns: A study of post-earnings announcement drift. Journal of
Accounting Research, 44(1), 85–112.
846 B. McSweeney / Accounting, Organizations and Society 34 (2009) 835–848
Geroski, P. A., & Gregg, P. (1997). Coping with recession: UK
Company performance in adversity. Cambridge: Cambridge University
Press.
Giannone, D., Lenza, M., & Reichlin, L. (2008). Explaining the great
moderation: It is not the shocks. Journal of the European Economic
Association, 6(2–3), 621–633.
Gjesdal, F. (1981). Accounting for stewardship. Journal of Accounting
Research, 19(1), 208–231.
Godley, W., Papadimitriou, D. B. & Zezza, G. (2008) Prospects for the United
States and the World: A crisis that conventional remedies cannot resolve,
The Levy Economics Institute of Bard College. Available at: http://
www.levy.org/pubs/sa_dec_08.pdf.
Gowan, P. (1999). The global gamble: Washington’s faustian bid for world
dominance. London: Verso.
Graham, J. R., Harvey, C. R., & Rajgopal, S. (2005). The economic
implications of corporate ?nancial reporting. Journal of Accounting
and Economics, 40, 3–73.
Grant, R. M. (1996). Toward a knowledge-based theory of the
?rm. Strategic Management Journal, 17(Winter Special Issue),
109–122.
Grant, R. M. (2002). Contemporary strategy analysis. Oxford: Basil
Blackwell.
Grant Thornton (2008). Business strategy and value-based management.
Available at: .
Grant Thornton (2009). Maximizing shareholder value. .
Greenspan, A. (2005). Testimony of Chairman Alan Greenspan before the
Committee on banking, Housing, and Urban affairs, US Senate,
February 16, 2005. Available at: .
Grossman, S. J., & Stiglitz, J. E. (1980). On the impossibility of
informationally ef?cient markets. American Economic Review, 70(3),
393–408.
Hansmann, H., & Kraakman, R. (2001). The end of history for corporate
law. Georgetown Law Journal, 89, 439–468.
Hilton, A. S., & O’Brien, P. C. (2009). Inco Ltd.: Market value, fair value and
management discretion. Journal of Accounting Research, 47(1),
179–211.
Hopwood, A. G. (2007). Whither accounting research? The Accounting
Review, 82(5), 1365–1374.
Huffschmid, J. (2008). Finance as driver of privatization. Transfer, 14(2),
209–236.
International Monetary Fund (2008). World economic outlook.
Washington, DC: International Monetary Fund.
International Financial Services London (2008). Hedge Funds 2008.
IFSL Research, July. .
Ittner, C. D., & Larcker, D. F. (2001). Assessing empirical research in
managerial accounting: A value-based management perspective.
Journal of Accounting and Economics, 32, 349–410.
Jensen, M. C. (1986). Agency cost of free cash ?ow, corporate ?nance, and
takeovers. American Economic Review, 76(2), 323–329.
Jensen, M. C. (1989). Eclipse of the public corporation. Harvard Business
Review, 67(5), 61–67.
Jürgens, U., Naumann, K., & Ruoo, J. (2000). Shareholder value in an
adverse environment: The case of Germany. Economy and Society,
29(1), 54–79.
Kaplan, S. N. (2008). Are US CEOs overpaid? Academy of Management
Perspectives(May), 5–20.
Ken, P. G. W. (1997). The process edge. Harvard Business Press.
Keim, D. B., & Stambaugh, R. F. (1984). A further investigation of the
weekend effect in stock returns. The Journal of Finance, 39(3), 819–835.
Keynes, J. M. (1936). The general theory of employment, interest and money.
London: Macmillan and Company.
Khurana, R. (2002). Searching for a corporate savior: The irrational quest for
charismatic CEOs. Princeton University Press.
Khoman, E., & Weale, M. R. (2008). Are we living beyond our means?
National Institute of Economic and Social Research. Discussion Paper
No. 311.
King, P. (1975). Is the emphasis on capital budgeting theory misplaced?
Journal of Business Finance and Accounting, 2(1), 69–82.
Klaus, V. (2009). Do not tie the markets – free them. Financial Times,
7(January), 2009.
Knight, F. H. (1957). Risk, uncertainty and pro?t. Boston, MA: Houghton
Mi?in.
Kotharai, S. P. (2001). Capital markets research in accounting. Journal of
Accounting and Economics, 31, 105–231.
KPMG (2009). Value based management available at .
Krippner, G. R. (2005). The ?nancialization of the American economy.
Socio-Economic Review, 3, 173–208.
Kuttner, R. (2007). Testimony of Robert Kuttner before the Committee on
Financial Services. US House of Representatives, October 2. Available at:http://?nancialservices.house.gov/hearing110/testimony_-_kuttner.
pdf.
Langmann, C. (2007). Stock market reaction and stock options plans:
Evidence from Germany. Schmalenbach Business Review, 59, 85–106.
Larcker, D. F., Richardson, S. A., & Tuna, A. I. (2007). Corporate governance,
accounting outcomes, and organizational performance. Accounting
Review.
Lazonick, W. (2007). The US stock market and the governance of
innovative enterprise. Industrial and Corporate Change, 16(6),
983–1035.
Lee, I. B. (2005). Ef?ciency and ethics in the debate about shareholder
primacy. University of Toronto Legal Studies Series. Research Paper,
No. 15-05. Available at: .
Liang, L. (2003). Post-earnings announcement drift and market partic-
ipants’ information biases. Review of Accounting Studies, 8, 321–345.
Lev, B. (2003). Prepared witness testimony to the US House of Representatives
Sub-Committee on Commerce, Trade, and Consumer Protection, September
25. Available at: .
Malkiel, B. G. (2005). Re?ections on the ef?cient market hypothesis: 30
years later. Financial Review, 40(1), 1–9.
Manthorpe, R. (2008). Tomorrow’s investor. London: Royal Society of Arts.
March, J. G. (2004). Parochialism in the evolution of a research
community: The case of organization studies. Management and
Organization Review, 1(1), 5–22.
Marens, R., & Wicks, A. (1999). Getting real: Stakeholder theory,
managerial practice and the general irrelevance of ?duciary
duties owed to shareholders, Business Ethics Quarterly, 9.2, 273–
293.
Matsumoto, D. A. (2002). Management’s incentives to avoid negative
earnings surprises. Accounting Review, 77(3), 483–514.
McCloskey, D. (1991). Voodoo economics. Poetics Today, 12(2), 287–300.
McGahan, A. M., & Porter, M. E. (1997). How much does industry really
matter? Strategic Management Journal, 27(11), 15–30.
McKinsey Inc., Copeland, T., Koller, T., & Murrin, J. (2000). Valuation:
Measuring and managing the value of companies. New York, NY: John
Wiley & Sons.
McSweeney, B. (2000). Looking forward to the past. Accounting,
Organizations & Society, 25, 767–786.
McSweeney, B. (2007). The pursuit of maximum shareholder value:
Vampire or Viagra? Accounting Forum, 31, 325–331.
McSweeney, B. (2008). Maximizing shareholder-value: A panacea for
economic growth or a recipe for economic and social disintegration?
Critical Perspectives on International Business, 4(1), 55–74.
Minsky, H. (1992). The ?nancial instability hypothesis. Working Paper 74,
Annandale-on-Hudson. NY: The Levy Economics Institute of Bard
College.
Morin, F. (2000). A transformation in the French model of shareholding
and management. Economy and Society, 29(1), 36–53.
Morin, R. A., & Jarrell, S. L. (2001). Driving shareholder value. New York NY:
McGraw-Hill.
Mossin, J. (1966). Equilibrium in capital asset markets. Econometrica,
34(4), 768–783.
Mouritsen, J. (1998). Driving growth: Economic value added
versus intellectual capital, Management Accounting Research, 9.4,
461–482.
Myers, J. N., Myers, L. A., & Skinner, D. J., (2007). Earnings momentum and
earnings management. Available at: .
Nissim, D., & Penman, S. H. (2001). Ratio analysis and equit valuation:
From research to practice. Review of Accounting Studies, 6(1), 109–154.
Offer, A. (2006). The challenge of af?uence. Oxford: Oxford University
Press.
Organization for Economic Cooperation and Development (2008).
Economic outlook no. 84. Paris: OECD.
Orhangazi, Ö. (2007). Financialization and capital accumulation in the
non-?nancial corporate sector: A theoretical and empirical
investigation of the US economy: 1973–2003. Working paper
Number 149. Political Economy Research Institute, University of
Massachusetts Amherst. Available at: .
O’Sullivan, M. (2000). Contests for corporate control: Corporate governance
and economic performance in the United States and Germany. Oxford:
Oxford University Press.
O’Sullivan, M. (2007). Acting out institutional change: Understanding the
recent transformations of the French ?nancial system. Socio-Economic
Review, 5, 389–436.
Ou, J., & Penman, S. (1992). Financial statement analysis and the evaluation
of market-to-book ratios. Working paper, Santa Clara University and
the University of California at Berkeley.
Penman, S. H. (2001). Financial statement analysis and security valuation.
New York, NY: McGraw-Hill/Irwin.
Pettengill, G. N. (2003). A survey of the Monday effect literature. Quarterly
Journal of Business and Economics, 42(3/4), 3–28.
Pfeffer, J., & Sutton, R. I. (2006). Hard facts, dangerous half-truths, and total
nonsense. Harvard Business School Press.
Plantin, G., Sapra, H., & Shin, H. S. (2008). Marking-to-market: Panacea or
Pandora’s box? Journal of Accounting Research, 46(2), 435–460.
Rajan, R. G., & Zingela, L. (2003). Saving capitalism from the capitalists:
Unleashing the power if ?nancial markets to create wealth and
opportunity for all. Crown Business.
Rand, A. (Ed.). (1986). Capitalism: The unknown ideal. New York, NY:
Signet.
Rappaport, A. (1987). Stock market signals to managers. Harvard Business
Review, 65(6), 57–62.
Rappaport, A., & Maubossin, M. J. (2001). Expectations investing. Boston:
Harvard Business School Press.
Rashes, M. S. (2001). Massively confused investors make conspicuously
ignorant choices. The Journal of Finance, LVI(5), 1911–1927.
Ravesncroft, S., & Williams, P. F. (2004). Considering accounting education
in the USA post-Enron. Accounting education, 13(s1), 7–23.
Riedel, E. (2004). An examination of long-lived asset impairments. The
Accounting Review, 79, 823–852.
Richardson, S. (2006). Over-investment of free cash ?ow. Review of
Accounting Studies, 11(2–3), 159–189.
Rose, C., & Mejer, C. (2003). The Danish corporate governance system:
From stakeholder orientation towards shareholder value. Corporate
Governance, 11(4), 335–344.
Rothbard, M. N. (1993). What is the free market? In: D. Henderson (Ed.),
The Fortune Encyclopedia of Economics (pp. 636–639). Time Warner.
Sanders, W. G., & Carpenter, M. A. (2003). Strategic satis?cing? A
behavioral-agency theory perspective on stock repurchase program
announcements. Academy of Management Journal, 46(2), 160–178.
Schilling, M., & Hill, C. (1998). Managing the new product development
process: Strategic imperatives. Academy of Management Journal, 12(3),
67–82.
Shiller, R. (2000). Irrational exuberance. Princeton: Princeton University
Press.
Shleifer, A., & Vishny, R. W. (1997). A survey of corporate governance.
Journal of Finance, 52(2), 737–783.
Siegel, P. A., & Hambrick, D. C. (2005). Pay disparities within top
management groups: Evidence of harmful effects on performance in
high-technology ?rms. Organization Science, 16, 259–274.
Simms, S. (2001). Marketing for value. Marketing 28(June), 34-35.
Soros, G. (2003). The Alchemy of Finance. Hoboken NJ: John Wiley & Sons.
Sperling, G. (2007). Rising-tide economics. Democracy(Fall), 1–4.
Stern, J. M., Stewart, G. B., & Chew, D. H. (1995). The EVA
Ò
Financial
Management System. Journal of Applied Corporate Finance, 8(2),
32–46.
Sternberg, E. (1994). Just business. London: Little, Brown & Co..
Stinchcombe, A. L. (2000). Social structure and organizations: A comment.
In J. Baum & F. Dobbin (Eds.), Economics meets sociology in strategic
management, advances in strategic management. Greenwich, CT: JAI
Press.
Stout, L. A. (2007). The mythical bene?ts of shareholder control. Virginia
Law Review, 93, 789–809.
Sundram, A. K., & Inkpen, A. C. (2004). The corporate objective revisited.
Organization Science, 15(3), 350–363.
Tett, G. (2008) Insight: Volatility returns with a vengeance, Financial
Times, October 27.
The Economist (1999). The wall falls: After years of trying, it seems that
America’s depression-era banking laws are about to be scrapped. What
difference will it make? Economist.Com, October 30. Available at: .
Thompson, G. (2008). The ?nancial crisis: Unorthodox thoughts. Open
Democracy, 3 October 2008.http://www.opendemocracy.net/node/
46380/pdf.
Thrift, N. (2001). It’s the romance, not the ?nance, that makes the
business worth pursuing’ disclosing a new market culture. Economy
and Society, 30(4), 412–432.
Tosi, H. L., Werner, S., Katz, J. P., & Gomez-Mejia, L. R. (2000). How much
does performance matter?: A meta-analysis of CEO pay studies.
Journal of Management, 26(2), 301–339.
Toynbee, P., & Walker, D. (2008). Unjust rewards. London: Granta.
US Congress Joint Economic Committee, One in eight Americans is living
in poverty, Poverty in America, August 26. Available at: .
US Congress (2009). Economic report of the President. Washington, DC:
US Government Printing Of?ce.
Watson, M. (2008). The split personality of prudence in the unfolding
political economy of New Labour. The Political Quarterly, 79(4),
578–589.
Wang, K., Li, Y., & Erickson, J. (1997). A new look at the Monday effect, The
Journal of Finance, 52.5, 2171–2186.
Whitley, R. (2008). Varieties of knowledge and their use in business and
management studies: Conditions and institutions. Organization
Studies, 29(4), 581–609.
Williams, J. (1938). The theory of investment value. Cambridge, MA:
Harvard University Press.
Williamson, O. E. (1985). The economic institutions of capitalism. New York,
NY: Free Press.
Yermack, D. (1995). Do corporations award CEO stock options effectively?
Journal of Financial Economics, 39(2–3), 237–269.
Yermack, D. (1997). Good timing: CEO stock option awards and company
news announcements. Journal of Finance, 52(2), 449–476.
Zimmerman, J. L. (2005). EVA and divisional performance measurement:
Capturing synergies and other issues. Journal of Applied Corporate
Finance, 10(2), 98–109.
848 B. McSweeney / Accounting, Organizations and Society 34 (2009) 835–848

doc_625063066.pdf