An institutional theory perspective on accounting evolution: Rulemakers’ belief and empirical evidence

Abstract

In recent years, why have we so often observed the setting of accounting rules that are not in keeping with, or have even gone against, the empirical evidence shown by archival studies? And, if these accounting rules are not based on facts that have been reported in the form of empirical evidence, then what has determined this rulemaking? Through answering these two questions, this paper demonstrates the formation process of accounting rules and the possibilities that exist for them to evolve, chiefly based on Comparative Institutional Analysis. The discussion and analysis show that rulemakers’ belief in "protecting the market" has been overriding the facts that stem from the market and playing a key role in standards setting process. The absence or presence of value relevance of accounting information is not the guideline for rulemaking but the result of it. As market participants become more acquainted with a new rule, their understanding of the accounting information supplied under the rule becomes institutionalized, which may explain evolutionary process of institutional change in accounting as a whole.