Incentives and Quality

40 Pages Posted: 9 Jun 2010

See all articles by Wuchun Chi

Wuchun Chi

National Chengchi University (NCCU) - Department of Accounting

Dan S. Dhaliwal

University of Arizona - Department of Accounting (deceased)

Oliver Zhen Li

National University of Singapore (NUS)

Tzong-Huei Lin

National Kaohsiung University of Applied Sciences - Department of Accounting

Date Written: June 9, 2010

Abstract

We examine whether it is incentives or standards that determine firms’ financial reporting quality using a natural experiment in Taiwan. Before 2001, Taiwan’s Company Act required private firms with capital levels exceeding a certain threshold to file and publish audited financial statements. This requirement was rescinded in 2001 and private firms since have had discretions over financial reporting. We take advantage of this regime change and divide private firms retroactively into two groups: voluntary reporting firms, those that have continued the reporting practice after the regime change; and non-voluntary reporting firms, those that have ceased the reporting practice after the regime change. We find that financial reporting quality is higher for voluntary reporting firms than for non-voluntary reporting firms, supporting the view that reporting incentives play an important role in determining reporting quality.

Keywords: International Accounting, Accounting Standards, Reporting Quality, Loss Avoidance, Income Smoothness, Earnings Conservatism

JEL Classification: M47, M41

Suggested Citation

Chi, Wuchun and Dhaliwal, Dan S. and Li, Oliver Zhen and Lin, Tzong-Huei, Incentives and Quality (June 9, 2010). Available at SSRN: https://ssrn.com/abstract=1622735 or http://dx.doi.org/10.2139/ssrn.1622735

Wuchun Chi

National Chengchi University (NCCU) - Department of Accounting ( email )

No. 64, Sec 2
Chih-Nan Road
Wenshan 116, Taipei
Taiwan
886-2-29393091-81031 (Phone)
886-2-29387113 (Fax)

HOME PAGE: http://www3.nccu.edu.tw/~wchi/

Dan S. Dhaliwal

University of Arizona - Department of Accounting (deceased)

Oliver Zhen Li (Contact Author)

National University of Singapore (NUS) ( email )

Bukit Timah Road 469 G
Singapore, 117591
Singapore

Tzong-Huei Lin

National Kaohsiung University of Applied Sciences - Department of Accounting ( email )

No. 415, Jiangong Road, Sanmin District
Kaohsiung, 80778
Taiwan
886-7-3814526#6604 (Phone)
886-7-3832344 (Fax)

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