Reporting quality and financial leverage: Are qualitative characteristics or earnings quality more important? Evidence from an emerging bank-based economy

2022 ◽  
Vol 60 ◽  
pp. 101578
Author(s):  
Ly Thi Hai Tran
Keyword(s):  
Earnings Quality ◽  
Reporting Quality ◽  
Financial Leverage ◽  
Important Evidence ◽  
Qualitative Characteristics

scholarly journals The Qualitative Characteristics of Accounting Information, Earnings Quality, and Islamic Banking Performance: Evidence from the Gulf Banking Sector

2020 ◽  
Vol 8 (2) ◽  
pp. 30
Author(s):  
Ibrahim Elsiddig Ahmed
Keyword(s):  
Financial Reporting ◽  
Positive Relationship ◽  
Banking Sector ◽  
Earnings Quality ◽  
Negative Relationship ◽  
Reporting Quality ◽  
Financial Reporting Quality ◽  
Annual Reports ◽  
Significant Positive Relationship ◽  
Qualitative Characteristics

The study aims to operationalize financial reporting quality in terms of the qualitative characteristics (QCs) as stated by the Accounting and Auditing Organization of Islamic Financial Institutions (AAOIFI) standards, as well as to investigate their association with earnings quality (EQ) and banking performance. The study uses secondary data extracted from DataStream to operationalize and measure the financial reporting quality in the annual reports of 25 out of the 27 Islamic banks in the Gulf Council Countries (GCC) for a 5-year period (2014–2018), meaning 125 annual reports were used. The study applies a manual content analysis to the annual reports to score all the items of QCs and operationalizes 25 measurement items that represent the six QCs. All items use 5-point Likert-type scales to compute the sub-score and the overall index through the Neural Network System. The findings of the model paths show a significant positive relationship between EQ and most of the QCs. The first hypothesis is partially accepted as there is a positive relationship between EQ and relevancy, reliability, prudence and general quality; however, there is no significant relationship between EQ and understandability and there is a significant negative relationship between EQ and comparability. Moreover, the study finds a significant positive relationship between EQ and ROA on one hand and EQ and ROE on the other hand (p-value = 0.00), meaning the second hypothesis is supported.

Accruals quality, financial constraints, and corporate cash holdings

2019 ◽  
Vol 45 (8) ◽  
pp. 1129-1145 ◽  
Author(s):  
Hatem Mansali ◽  
Imen Derouiche ◽  
Karima Jemai
Keyword(s):  
Information Asymmetry ◽  
Financial Constraints ◽  
Earnings Quality ◽  
Cash Holdings ◽  
Reporting Quality ◽  
Discretionary Accruals ◽  
Content Type ◽  
Accruals Quality ◽  
Corporate Cash Holdings ◽  
High Information

Purpose The purpose of this paper is to examine how information asymmetry driven by earnings quality affects corporate cash holdings. It also investigates the role that financial constraints play in this effect. Design/methodology/approach The paper examines a large sample of 6,501 observations of 741 firms listed on Euronext Paris over the period 2000–2015. Earnings quality is computed using the Jones model performance-matched discretionary accruals developed by Kothari et al. (2005): the larger the absolute value of discretionary accruals, the lower the accruals quality. Findings The study finds that firms with poor accruals quality hold more cash and that cash holdings in firms of low reporting quality are higher under financial constraints. These results indicate that firms tend to increase their cash reserves in the presence of high information asymmetry which is notably driven by low accounting quality. The findings also suggest that information asymmetry associated with low reporting quality is greater when firms also have strong financial constraints. The study’s conclusions are consistent with the precautionary motive for cash holdings. Practical implications The results would enhance practitioners’ awareness of the importance of accounting choices in the management of cash policies. It would also give researchers an incentive to further explore how these policies are influenced by the precautionary behavior of managers. Originality/value This paper is the first work to investigate the effect of accruals quality on corporate cash holdings in the French equity market, which typically has a poor information environment resulting in high information asymmetry. Moreover, the role of financial constraints in this effect has not yet been explored.

Financial reporting quality and share price movement-evidence from listed companies in Bangladesh

2020 ◽  
Vol 18 (3) ◽  
pp. 425-458
Author(s):  
Md. Mamunur Rashid
Keyword(s):  
Financial Reporting ◽  
Stock Exchange ◽  
Reporting Quality ◽  
Share Price ◽  
Financial Reporting Quality ◽  
Annual Reports ◽  
Developing Economy ◽  
Price Movement ◽  
Content Type ◽  
Qualitative Characteristics

Purpose The purpose of this study is to examine the effect of financial reporting quality (FRQ) on share price movement (SPM) of listed companies in an emerging and developing economy – Bangladesh. Design/methodology/approach The study analyzed 296 annual reports for the year 2015 and 2016 in examining the effect of FRQ on SPM. Ordinary least squares (OLS) regression model is used to examine the hypothesized relationship among the variables. A modified version of Lang et al. (2003) has been adopted in measuring the SPM. FRQ is measured using the qualitative characteristics approach as defined by the International Financial Reporting Standard Framework and used by Beest et al. (2009) and Braam and Beest (2013). Findings The study finds a positive association (though not significant statistically) between the FRQ and SPM in the country’s leading stock exchange (Dhaka stock exchange). Furthermore, the effect of enhancing quality on SPM is found to be stronger as compared to fundamental quality. Majority of the FRQ constructs demonstrate an improvement in the quality score in the year 2016 as compared to 2015 except for relevance. Research limitations/implications The key limitation of the study is that it focuses only on two years (2015 and 2016) annual reports data in measuring FRQ and its effect on SPM. Originality/value The study uses qualitative characteristics approach in measuring the FRQ and to examine its effect on SPM using the context of an emerging and developing economy – the case of Bangladesh.

Do sin firms engage in real activities manipulation to meet earnings benchmarks?

2020 ◽  
Vol 28 (3) ◽  
pp. 535-551
Author(s):  
Suzanne M. Ogilby ◽  
Xinmei Xie ◽  
Yan Xiong ◽  
Jin Zhang
Keyword(s):  
Financial Reporting ◽  
Earnings Quality ◽  
Abnormal Returns ◽  
Reporting Quality ◽  
Production Costs ◽  
Financial Statement ◽  
Financial Reporting Quality ◽  
Content Type ◽  
Earnings Benchmarks ◽  
Real Activities Manipulation

Purpose Recent literature suggests that sin firms (firms in tobacco, gambling and alcohol industries) have lower institutional ownership, fewer analysts following, higher abnormal returns and higher financial reporting quality. This study aims to investigate empirically how sin firms engage in real activities manipulation (RAM) to meet earnings benchmarks in comparison to non-sin firms. Design/methodology/approach The authors examine two types of RAM, namely, Cutting discretionary expenditures including research and development (R&D), SG&A and advertising to boost earnings. Extending deep discount or lenient credit terms to boost sales and/or overproducing to decrease COGS to increase gross profit. Consistent with Roychowdhury (2006), the authors use abnormal discretionary expenditures as the proxy for expenditure reduction manipulation and abnormal production costs as the proxy for COGS manipulation. Findings The results for the abnormal discretionary expense model suggest that sin firms do not engage in RAM of advertising, R&D, SG&A expense to just meet earnings benchmarks. The results for the production costs model suggest that sin firms do not engage in COGS manipulation to just meet earnings benchmarks. The results are robust after controlling accrual-based earnings management (AEM). Overall, in this setting, these results suggest that managers of sin firms engage less in RAM to meet earnings benchmarks. Originality/value The findings are of interest to investors, auditors, regulators and academics with respect to financial statement analysis and earnings quality.

scholarly journals Earnings quality across different reporting regimes

2018 ◽  
Vol 19 (1) ◽  
pp. 2-19 ◽  
Author(s):  
Siming Liu ◽  
Len Skerratt
Keyword(s):  
Financial Reporting ◽  
Earnings Quality ◽  
Reporting Quality ◽  
Listed Companies ◽  
Poor Quality ◽  
Small Companies ◽  
Small Company ◽  
Content Type ◽  
Income Statement ◽  
The Uk

Purpose Since the UK Companies Act 1981, different reporting standards have developed for different classes of company to reduce the reporting burden on non-listed companies. There are now different regimes for listed, large private, medium-sized, small and micro companies. This strategy raises the issue of whether earnings quality across the different classes of company is comparable. The paper aims to discuss this issue. Design/methodology/approach The paper uses the smoothness of earnings to measure reporting quality across the different types of companies from 2006 to 2013, based on 514,000 observations. Smoothness is an indicator of poor quality. Findings The authors find that listed companies have the highest earnings quality, closely followed by small and micro companies. In contrast, large private and medium-sized companies have much lower earnings quality. Overall, the authors find companies which switch between reporting regimes have lower earnings quality. The authors also find that earnings quality is not affected by the small company exemption from audit. Research limitations/implications Companies filing abbreviated accounts are excluded since they do not file an income statement. The recent revisions to UK GAAP (FRS 102 and FRS 105) are not examined due to insufficient data. Practical implications The Financial Reporting Council’s (FRC) strategy of reducing the financial reporting and auditing obligations for small companies seems not to have significantly affected earnings quality. However, the FRC may need to review the reporting requirements of large private and medium-sized companies and also the option of companies to switch between reporting regimes; in these settings earnings quality appears to be weaker. Originality/value The paper studies the effect of earnings quality across the different reporting regimes in the UK. Novel and important features of the study are that the sample covers a wide variety of small and micro companies which have not been analyzed previously; the results are disaggregated by year, for assurance that the results are not driven by a single rogue year; and the authors also address the small company exemption from audit, and the flexibility of non-listed companies to switch between regimes.

scholarly journals Company’s Sustainability and Accounting Conservatism: Firms Delisting from KOSDAQ

2019 ◽  
Vol 11 (6) ◽  
pp. 1775 ◽  
Author(s):  
Hyuk Shawn ◽  
Yun-wha Kim ◽  
Jae-gyung Jung
Keyword(s):  
Capital Market ◽  
Earnings Quality ◽  
Reporting Quality ◽  
Discretionary Accruals ◽  
Accounting Conservatism ◽  
Litigation Risk ◽  
Reported Earnings ◽  
Quality Measurements ◽  
The Capital Market

This paper finds evidence that delisting firms make reported earnings more conservative to avoid litigation risk. Conservatism has been used as one of suitable reporting quality measurements that is separate from discretionary accruals, in that investors can monitor the firm’s contract efficiency or litigation risk by demanding conservatism. We collect a sample that is composed of 6348 listed non-financial companies for the period 2009–2016. Our results are as follows. First, we find that companies ahead of delisting are more conservative than other companies in Korean Securities Dealers Automated Quotations (KOSDAQ). Second, companies that are ahead of delisting whose auditor is non-big4 are significantly more conservative. Our results imply that companies that are in the process of delisting are seeking to increase their sustainability and to improve earnings quality, such as conservatism, and that small auditors are more conservative in order to mitigate the higher risk of litigation in comparison with big4 auditors. This study has a role to complement prior studies regarding delisting, and provides that the delisting institutions in KOSDAQ market can improve the efficiency and the reliability of the capital market.

Accounting conservatism, capital structure, and global diversification

2015 ◽  
Vol 27 (1) ◽  
pp. 119-138 ◽  
Author(s):  
Feras M Salama ◽  
Karl Putnam
Keyword(s):  
Capital Structure ◽  
Financial Reporting ◽  
Fixed Effects ◽  
Reporting Quality ◽  
Accounting Conservatism ◽  
Fixed Effects Model ◽  
Financial Leverage ◽  
Content Type ◽  
The Impact ◽  
Global Diversification

Purpose – The purpose of this paper is to investigate the effect of accounting conservatism (as a proxy for financial reporting quality) on the degree of financial leverage. In addition, this paper examines the impact of global diversification (as a proxy for operational complexity) on the relationship between conservatism and financial leverage. Design/methodology/approach – A panel data regression analysis is conducted for the period 2000-2006. The authors utilized a two-way fixed-effects model to control for unobservable firm characteristics and time effects that may influence the firm’s decision to report conservatively. Findings – This paper provides empirical evidence that conservatism is positively associated with the degree of financial leverage, and the influence of conservatism on financial leverage is enhanced by the degree of global diversification. Originality/value – A major issue in corporate finance is the identification of variables that influence corporate capital structure choices. The evidence presented in this paper reveals that more conservative financial reporting is associated with a higher degree of financial leverage in the firm’s capital structure. This effect increases with the extent of global diversification, indicating that bondholders place a higher value on conservatism when there is more information asymmetry between stakeholders and managers caused by global diversification.

scholarly journals Financial reporting quality in large energy & mining companies: A Canadian case

2015 ◽  
Vol 12 (3) ◽  
pp. 428-440
Author(s):  
Yusuf Mohammed Nulla
Keyword(s):  
Financial Reporting ◽  
Quantitative Research ◽  
Earnings Quality ◽  
Research Question ◽  
Market Price ◽  
Reporting Quality ◽  
Cash Flows ◽  
Income Smoothing ◽  
Mining Companies ◽  
Ifrs Adoption

This paper primarily examines the effect of the mandatory IFRS adoption in Canada by the Canadian energy companies. It is a comparative study between the Canadian GAAP and IFRS from 2008 to 2012. Since this research is an empirical study, the quantitative research method is applied. The research question for this research study is: Does IFRS adoption in the Canadian energy and mining companies improve accounting quality?. This research finds that earnings quality has increased due to the lower volatility between earnings and market price; enhance predictability in the cash flows and financial forecasting (cash related); and stronger influence of earnings to shareholder value. However, it also finds that earnings quality has reduced due to lower persistency and predictability; and less accruals and timeliness loss of recognition (increase in income smoothing).

Does IPSAS adoption reduce corruption’s level? New evidence from ODA beneficiary countries

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Mounira Hamed-Sidhom ◽  
Yosra Hkiri ◽  
Ahmed Boussaidi
Keyword(s):  
Financial Reporting ◽  
Accounting Standards ◽  
Reporting Quality ◽  
Financial Reporting Quality ◽  
Content Type ◽  
Underdeveloped Countries ◽  
Useful Signal ◽  
The Impact ◽  
New Evidence ◽  
Important Evidence

Purpose The accounting literature suggests that the use of accounting standards with greater quality promotes the financial reporting quality and enhances accountability. This study aims to investigate the effect of the International Public Sector Accounting Standards (IPSAS) adoption, by official development assistance (ODA) beneficiary countries, on the reported level of their perceived corruption. Design/methodology/approach We investigate a sample of ODA beneficiary countries (168 country-year observations) facing rising levels of corruption. We apply a panel regression analysis for these countries during the period from 2015 to 2018. Findings The findings suggest that the IPSAS’ adoption can significantly influence the level of perceived corruption and implement important evidence about promoting transparency factor for underdeveloped countries. Originality/value This study contributes to the accounting literature by examining the theoretical and empirical insights about the impact of the of IPSAS’ adoption on the level of corruption, which can be considered as a new area of accounting literature and a useful signal for stakeholders in countries seeking adequate solutions to combat and fight corruption activities.

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