Management Science, Forthcoming
60 Pages Posted: 26 Apr 2012 Last revised: 1 Feb 2016
Date Written: July 17, 2015
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: 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