The late nineteenth-century revolution in financial reporting: Accounting for the rise of investor or managerial capitalism?

Abstract

Conventional accounting history explains the rise of modern financial reporting (MFR) in the U.K. in the late nineteenth century, the publication of independently audited, cost-based accrual accounts, as a response to the appearance of “managerial capitalism”, the “divorce” of ownership from control. It is almost universally accepted that MFR had no clear conceptual foundation and that management was able to manipulate published accounts in its own interests. Many historians assume the result was capital market inefficiency. A minority explicitly assumes capital market efficiency, but also explains MFR as the consequence of management's pursuit of self-interest. However, it is argued here that MFR was clearly conceptualized, and the hypothesis is explored that its emergence and functioning in the late nineteenth century can more plausibly be explained as a response to the rise of “investor capitalism”, the general socialization of capital which Marx predicted. From the 1880s shareholders began to passively hold well-diversified portfolios. Although ownership and control certainly became separated, their nature had fundamentally changed. For the first time in history on a large scale, industrial companies became collectively owned. It is argued that the rise of MFR can be explained as a response to the demand from investors collectively for help in managing the new social relationships which emerged between them and management, and between individual investors. It is concluded that when understood in the social, political and economic contexts in which it functioned, the evidence is consistent with the hypothesis that late nineteenth-century MFR provided investors with useful information, and that the capital market was efficient.