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Principles-Based Standards and Earnings AttributesDavid FolsomLehigh University Paul HribarUniversity of Iowa - Henry B. Tippie College of Business Richard Mergenthaler Jr.University of Iowa - Henry B. Tippie College of Business Kyle PetersonUniversity of Oregon - Charles H. Lundquist School of Business April 25, 2012 Abstract: This study examines the relation between principles-based standards and earnings attributes. We create a firm-level instrument that measures the extent to which firms are impacted by principles-based standards. We find that firms’ earnings are more informative, persistent, and better predict future cash flows when their standards are more principles-based. Our evidence is consistent with managers using the additional discretion provided by principles-based standards to better communicate the economic substance of transactions rather than to distort earnings.
Number of Pages in PDF File: 56 Keywords: rules, principles, standards, earnings persistence, earnings attributes JEL Classification: M41, M43, M44 working papers seriesDate posted: April 26, 2012 ; Last revised: March 29, 2013Suggested CitationContact Information
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