Do Accrual Accounting Standards Influence the Information Quality of Financial Statements: evidences from 17 countries
Date Issued
2005
Date
2005
Author(s)
Hsu, Yun-sheng
DOI
zh-TW
Abstract
Although accrual-based accounting can improve the temporal discrepancies between revenue and expense recognition found in cash-based accounting and raise the value of financial reporting information, the literature on the subject holds that earnings management behavior is a general phenomenon in accrual-based accounting, and that such earnings management behavior may impair the value of financial reporting information. On this disadvantageous influence, Hung (2001) holds that the method of raising the level of investor protection can lower opportunistic earnings management behavior in order to protect the goal of accrual-based accounting raising the value of reported financial information.
But this paper argues that Hung’s (2001) viewpoint ignores the causal relationship between a high level of investor protection and accrual-based accounting systems, and the fact that informative earnings management behavior also exists. The present study revises Hung’s (2001) research, by considering that on the basis of having accrual-based accounting as a result of a high level of investor protection, and at the same time considering informative and opportunistic earnings management behavior using 32,340 firms/year observations in 17 countries between 1991 and 2002, to retest the influences of investor protection and accrual accounting on the level of earnings management and the value relevance of financial statements information.
Empirical results uncovered that investor protection lowers the level of opportunistic earning management, and increases the value relevance of financial statements information. As far as the influence of accrual-based accounting goes, in an environment of low investor protection, accrual-based accounting promotes opportunistic and informative earnings management behavior of firms, and where there is a tendency towards informative earnings management behavior, accrual-based accounting increases the value relevance of financial statements information, but where there is a tendency towards opportunistic earnings management, the level of value relevance will be lowered; but in an environment of high investor protection, although the influence of accrual-based accounting on the informative and opportunistic earnings management behavior of firms is unclear, in situations in which there is a tendency towards informative earnings management behavior, accrual-based accounting increases the value relevance of financial statements information, and in situations where there is a tendency towards opportunistic earnings management behavior, there is no finding of a deleterious influence of accrual-based accounting on the value relevance of financial statement information.
The results explain that from the standpoint of increasing the value of financial statements information, in a situation with both high investor protection and a tendency towards informative earnings management by firms, accrual-based accounting is the direction in which the accounting system should go; but where there is low investor protection and a tendency for firms to engage in opportunistic earnings management behavior, there should first be an effort to raise the level of investor protection or change enterprises’ engaging in opportunistic earnings management behavior before adopting accrual-based accounting.
Subjects
盈餘管理
投資人保護
價值攸關
accrual-based accounting
investor protection
earnings management
value relevance
Type
other