Measuring Accounting Asset Informativeness

We develop and validate an empirical measure of the informativeness of accounting assets in measuring firm-specific economic capital, an important determinant of both cash flows and intrinsic values. Our validation tests show that the asset informativeness measure is sensitive to differences in both accounting methods and implementation decisions at the firm level, and corresponds to the way equity investors use the information in accounting assets. We find that accounting assets contain substantial information about firms' productive capacity (economic capital) and the information is not summarized in several earnings attributes often associated with earnings quality.

How Does Culture Impinge Upon Managers’ Demeanor of Earnings Management? Evidence from Cross-Country Analysis

We examine the impact of national culture on earnings. Specifically, we examine managers’ likelihood of using accrual or real earnings management (REM) and the role of culture on various attributes of earnings (accruals quality, persistence, smoothing, and predictability). We measure national culture using Hofstede’s six dimensions of culture (1984, 2001, 2010). Using data from 36 countries during 1997–2018, we find that managers are likely to use both accruals and REM in high power distance (PDI) countries. In long-term-oriented countries, managers are more likely to use REM. In uncertainty avoidance (UAI) countries, in high individualist countries, and in higher indulgent versus restraint countries, managers are less likely to use either type of earnings management. In masculine countries, managers tend to use lower accruals management and rely on production cost REM. We also find the use of accruals management and the use of REM are substitutes for each other. In addition, we are able to classify countries into four earnings quality groups based on the culture impact on the earnings attributes (primarily driven by accruals quality, predictability, and smoothing). Persistence is generally not significant in classifying countries by earnings attributes. Our findings indicate that a universal set of accounting standards is a challenging goal to achieve given the cultural diversity across countries. To improve the existing corporate governance framework and to ensure high quality and uniform financial statements, the enforcement of standards should be tailored to specific cultures, or at a minimum, corporate boards need to be more culturally diversified.

Revenue-expense versus asset-liability model

Purpose The purpose of this study is to analyse the impact of two different financial reporting models (revenue-expense vs asset-liability) on several earnings attributes. Design/methodology/approach The analysis compares the earnings attributes of non-financial private firms using the Italian generally accepted accounting principles (Italian GAAP, based on a revenue-expense model) with those of the Italian non-financial private firms voluntarily adopting the international financial reporting standards (IFRS, based on the asset-liability model). To address major methodological concerns, the research design is based on a single-country analysis and on three different samples as follows: firms voluntarily adopting IFRS; a matched sample of Italian GAAP firms; Italian GAAP firms belonging to the Elite programme, and therefore, comparable to the IFRS adopters in terms of incentives towards financial reporting transparency. Findings The results show that firms reporting under a revenue-expense model are characterized by a stronger revenue-expense matching degree, along with higher earnings’ persistence, earnings’ predictability and conditional conservatism than firms adopting an asset-liability model. In addition, contrary to the expectations, Italian GAAP firms do not present smoother earnings and do not report greater abnormal accruals than IFRS adopters do. Overall, the findings suggest that the switch from a revenue-expense model to an asset-liability model negatively affects several earnings attributes of non-financial private companies, shedding new light on the drawbacks associated with the adoption of the IFRS accounting model. Originality/value This study addresses a theme characterized by sparse research efforts, adding new insights to the debate on the decline in the quality of earnings and on the drawbacks associated with the adoption of the IFRS accounting model.