Is financial reporting shaped by equity markets or by debt markets? An international study of timeliness and conservatism

Is financial reporting shaped by equity markets or by debt markets? An international study of... We hypothesize debt markets—not equity markets—are the primary influence on “association” metrics studied since Ball and Brown (1968 J Account Res 6:159–178). Debt markets demand high scores on timeliness, conservatism and Lev’s (1989 J Account Res 27(supplement):153–192) R 2, because debt covenants utilize reported numbers. Equity markets do not rate financial reporting consistently with these metrics, because (among other things) they control for the total information incorporated in prices. Single-country studies shed little light on debt versus equity influences, in part because within-country firms operate under a homogeneous reporting regime. International data are consistent with our hypothesis. This is a fundamental issue in accounting. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Accounting Studies Springer Journals

Is financial reporting shaped by equity markets or by debt markets? An international study of timeliness and conservatism

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Publisher
Springer Journals
Copyright
Copyright © 2008 by Springer Science+Business Media, LLC
Subject
Business and Management; Accounting/Auditing; Corporate Finance; Public Finance
ISSN
1380-6653
eISSN
1573-7136
D.O.I.
10.1007/s11142-007-9064-x
Publisher site
See Article on Publisher Site

Abstract

We hypothesize debt markets—not equity markets—are the primary influence on “association” metrics studied since Ball and Brown (1968 J Account Res 6:159–178). Debt markets demand high scores on timeliness, conservatism and Lev’s (1989 J Account Res 27(supplement):153–192) R 2, because debt covenants utilize reported numbers. Equity markets do not rate financial reporting consistently with these metrics, because (among other things) they control for the total information incorporated in prices. Single-country studies shed little light on debt versus equity influences, in part because within-country firms operate under a homogeneous reporting regime. International data are consistent with our hypothesis. This is a fundamental issue in accounting.

Journal

Review of Accounting StudiesSpringer Journals

Published: Jan 4, 2008

References

  • Performance pricing in bank debt contracts
    Asquith, P.; Beatty, A.; Weber, J.
  • The role of accruals in asymmetrically timely gain and loss recognition
    Ball, R.; Shivakumar, L.
  • The relevance of the value relevance literature for financial accounting standard setting: Another view
    Barth, M. E.; Beaver, W. H.; Landsman, W. R.
  • The conservatism principle and asymmetric timeliness of earnings
    Basu, S.
  • Financial reporting incentives for conservative accounting: The influence of legal and political institutions
    Bushman, R. M.; Piotroski, J.
  • What determines corporate transparency
    Bushman, R. M.; Piotroski, J.; Smith, A. J.

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