Principles-Based Standards and Earnings Attributes

Management Science, Forthcoming

60 Pages Posted: 26 Apr 2012 Last revised: 1 Feb 2016

David Folsom

Lehigh University

Paul Hribar

University of Iowa - Henry B. Tippie College of Business

Richard Mergenthaler Jr.

University of Iowa - Henry B. Tippie College of Business

Kyle Peterson

University of Oregon - Charles H. Lundquist School of Business

Date Written: July 17, 2015

Abstract

This study examines the relation between principles-based standards and earnings attributes. We create a firm-year specific variable that measures the extent to which firms’ financial reporting is affected by principles-based standards. We find that firms’ earnings are more informative and persistent, and have a larger positive association with future cash flows, on average, when firms’ standards are more principles-based. We also find evidence that managers use the added discretion provided by principles-based standards to manage earnings when firms are near bankruptcy, issuing equity, or experiencing high growth, and if earnings are near prominent earnings benchmarks. Overall, our evidence is consistent with managers using the discretion provided by principles-based standards to communicate better the economic substance of transactions, on average, but also with some managers using the added discretion strategically when managerial incentives exist to increase reported earnings.

Keywords: Keywords: Principles-Based Standards, Earnings Persistence, Earnings Attributes, Accounting

JEL Classification: M40, M41, M49

Suggested Citation

Folsom, David and Hribar, Paul and Mergenthaler, Richard and Peterson, Kyle, Principles-Based Standards and Earnings Attributes (July 17, 2015). Management Science, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2046190 or http://dx.doi.org/10.2139/ssrn.2046190

David Folsom

Lehigh University ( email )

Bethlehem, PA 18015
United States

Paul Hribar

University of Iowa - Henry B. Tippie College of Business ( email )

Dept. of Accounting
Iowa City, IA 52242-1000
United States
319-335-1008 (Phone)

Richard Dean Mergenthaler Jr. (Contact Author)

University of Iowa - Henry B. Tippie College of Business ( email )

108 Pappajohn Business Building
Iowa City, IA 52242-1000
United States
319-335-0848 (Phone)

Kyle Peterson

University of Oregon - Charles H. Lundquist School of Business ( email )

1208 University of Oregon
Eugene, OR 97403-1208
United States

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