A selective critical review of financial accounting research

This essay provides a selective critical review of the financial accounting literature focusing primarily on accounting valuation including implied costs of equity capital, empirical accounting proxies, and frictions in accounting theory. In the opinion of this author, accounting research in these areas is often too complacent, suffering from a lack of critical reasoning. Complacency distorts research innovation and hinders the long-run sustainability of accounting academe in the area of financial accounting. The examples discussed in this essay include (but are not limited to) the issue of structural modeling and model falsifiability; determining whether a firm is over or underpriced based on valuation models that do not allow for such phenomena; arbitrarily ‘‘merging’’ two disparatemodels one for valuation and one for the discount rate; failing to appreciate the empirical limitations induced by risk-neutral valuation models in estimating costs of capital; employing the same proxies over and over again that ostensibly have no underlying theoretical bases; estimating regressions that necessarily yield biased coefficients when the econometrics literature provides ready solutions; and generating complex models absent the frictions that are essential to the issue being researched. 2013 Published by Elsevier Ltd. § I would like to acknowledge the anonymous referees of this Journal and the issue editors Yves Gendron and Christopher Humphrey for their constructive comments. I would also like to thank Mo Khan, Stephannie Larocque, Matt Lyle and Dan Segal for reading and commenting on an earlier version. They are certainly not responsible for the views expressed in this study. In fact, I have a sneaking suspicion that they disagree with (some of) them. * Tel.: +1 502 895 2670; fax: +1 502 582 4720. E-mail address: [email protected]. G Model YCPAC-1795; No. of Pages 11 Please cite this article in press as: Callen J. A selective critical review of financial accounting research. Crit Perspect Account (2013), http://dx.doi.org/10.1016/j.cpa.2013.03.008