Is Financial Reporting Shaped by Equity Markets or by Debt Markets? An International Study of Timeliness and Conservatism

Abstract

We hypothesize debt markets - not equity markets - are the primary influence on association metrics studied since Ball and Brown (1968). Debt markets demand high scores on timeliness, conservatism and Lev's (1989) RSQ, because debt covenants utilize reported numbers. Equity markets do not rate financial reporting consistently with these metrics, because (among other things) they control for the total information incorporated in equity prices.

Single-country studies shed little light on the relative influences of debt and equity, because their firms operate under a homogeneous reporting regime. International data are consistent with our hypothesis. This is a fundamental issue in accounting.

Keywords: reporting quality, association studies, conservatism, timeliness, international

JEL Classification: F30, G15, G18, G32, K33, M41, M44