Earnings Quality in U.K. Private Firms
University of Chicago
London Business School
April 2, 2004
LBS Accounting Subject Area Working Paper No. ACCT025
UK private and public companies face substantially equivalent regulation on auditing, accounting standards and taxes. We hypothesize that private-company financial reporting nevertheless is lower quality due to different market demand, regulation notwithstanding. A large UK sample supports this hypothesis. Quality is operationalized using Basu's (1997) time-series measure of timely loss recognition and a new accruals-based method. The result is not affected by controls for size, leverage, industry membership and auditor size, or by allowing endogenous listing choice. The result enhances understanding of private companies, which are predominant in the economy. It also provides insight into the economics of accounting standards.
Number of Pages in PDF File: 65
Keywords: Earnings quality; conservatism; loss recognition; private firms; economics of accounting standards; earnings time series; accruals.
JEL Classification: M41, K22, N24working papers series
Date posted: May 20, 2004
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