Abstract

http://ssrn.com/abstract=2046190
 
 

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Principles-Based Standards and Earnings Attributes


David Folsom


Lehigh University

Paul Hribar


University of Iowa - Henry B. Tippie College of Business

Richard Mergenthaler Jr.


University of Iowa - Henry B. Tippie College of Business

Kyle Peterson


University of Oregon - Charles H. Lundquist School of Business

July 17, 2015

Management Science, Forthcoming

Abstract:     
This study examines the relation between principles-based standards and earnings attributes. We create a firm-year specific variable that measures the extent to which firms’ financial reporting is affected by principles-based standards. We find that firms’ earnings are more informative and persistent, and have a larger positive association with future cash flows, on average, when firms’ standards are more principles-based. We also find evidence that managers use the added discretion provided by principles-based standards to manage earnings when firms are near bankruptcy, issuing equity, or experiencing high growth, and if earnings are near prominent earnings benchmarks. Overall, our evidence is consistent with managers using the discretion provided by principles-based standards to communicate better the economic substance of transactions, on average, but also with some managers using the added discretion strategically when managerial incentives exist to increase reported earnings.

Number of Pages in PDF File: 60

Keywords: Keywords: Principles-Based Standards, Earnings Persistence, Earnings Attributes, Accounting

JEL Classification: M40, M41, M49


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Date posted: April 26, 2012 ; Last revised: February 1, 2016

Suggested Citation

Folsom, David and Hribar, Paul and Mergenthaler, Richard and Peterson, Kyle, Principles-Based Standards and Earnings Attributes (July 17, 2015). Management Science, Forthcoming. Available at SSRN: http://ssrn.com/abstract=2046190 or http://dx.doi.org/10.2139/ssrn.2046190

Contact Information

David Folsom
Lehigh University ( email )
Bethlehem, PA 18015
United States
Paul Hribar
University of Iowa - Henry B. Tippie College of Business ( email )
Dept. of Accounting
Iowa City, IA 52242-1000
United States
319-335-1008 (Phone)
Richard Dean Mergenthaler Jr. (Contact Author)
University of Iowa - Henry B. Tippie College of Business ( email )
108 Pappajohn Business Building
Iowa City, IA 52242-1000
United States
319-335-0848 (Phone)
Kyle Peterson
University of Oregon - Charles H. Lundquist School of Business ( email )
1208 University of Oregon
Eugene, OR 97403-1208
United States
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