Effects of Accounting Enforcement on Financial Reporting: A Game-theoretic Analysis in a Capital Market Setting

Abstract

This paper conducts a game-theoretic analysis of a manager’s and an auditor’s behaviors using a model that includes accounting enforcement and capital markets. The findings demonstrate that a stronger accounting enforcement does not necessarily result in higher financial reporting quality. Conversely, the findings also indicate that an increase in accounting enforcement is effective for improving audit quality. Moreover, the study analyzes the effect of accounting enforcement on stock market prices, thereby determining that stronger accounting enforcement brings the expected stock price closer to a reasonable value. This result indicates that an increase in accounting enforcement protects investors in the capital market. This paper contributes to the analysis of the impact of an increase in accounting enforcement in a more realistic setting while considering the capital market.