Myth: External Financial Reporting Quality Has a 1st Order Effect on Firm Value
12 Pages Posted: 19 Jan 2013 Last revised: 6 Sep 2013
Date Written: December 29, 2012
Abstract
I argue that external financial reporting quality has at best a 2nd order effect on firm value of U.S. publicly traded companies and that attempts to improve a firm’s external reporting quality has a 3rd order effect on these firms’ value. Recognizing that external financial reporting quality is at best a 2nd order effect on firm value imposes an important external validity test on accounting research. If the economic magnitude of the study’s proxy for quality on firm value is “too large,” then the researcher should question the research design strategy and whether correlated omitted variables, endogeneity, or sample selection bias are corrupting the study’s inferences.
Keywords: accounting quality, earnings quality, earnings management, financial reporting quality
JEL Classification: M40, M41
Suggested Citation: Suggested Citation
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