The Effects of Accounting Standard Setting on Accounting Quality

Abstract

We investigate the accounting quality attributes of nineteen general purpose accounting standards implemented over the past thirty years. Our research is timely given recent criticism of U.S. standard setting, within the context of international convergence. Evidence on how U.S. accounting standards impact accounting quality helps evaluate the overall standard setting process. While we find no differences in earnings forecast dispersion or persistence before and after accounting standards implemented during this period, analyst forecast errors decrease following new standards consistent with improved information environments for the analysts to forecast earnings. Earnings response coefficients (ERCs) and accrual quality decrease, but the value relevance of the balance sheet increases, consistent with the trend toward an asset/liability focus of accounting standards. These results are consistent with FASB's adherence to definitions of assets and liabilities (a balance sheet focus) and enhanced disclosures in implementing standards during this period. Thus, we provide evidence based on existing standards that can be used to assess the merits of the U.S. standard setting and to evaluate proposals on the direction of future standard setting.

Keywords: Accounting Quality, Accounting Standard Setting, GAAP

JEL Classification: M41, M44, M45, G29