The Use of Mathematical Models in Financial Accounting

Well over a year ago it was proposed that I write a survey paper for this conference which discussed the role of mathematical models in financial accounting. The difficulty with this assignment is that mathematical models have been used to address a wide variety of issues in financial accounting, and a paper which touched on all of them would probably be unable to examine any single one in depth. Therefore, I have chosen in financial accounting three popular mathematical modeling themes and have interpreted these themes in the context of a competitive equilibrium market model, to lend greater cohesiveness to the discussion. I refer to the three topics chosen as: (1) assessing the consequences of public disclosure; (2) formalizing the notion that markets are efficient with respect to information; and (3) understanding the effect of increased public disclosure on private incentives to acquire information. Other areas in financial accounting which use mathematical models, but are not discussed here, include income measurement, valuation models (i.e., models which map accounting variables, or other information, into equi-

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