Principles-Based Standards and Earnings Attributes

Management Science, Forthcoming

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

See all articles by David Folsom

David Folsom

University of Texas at El Paso - Department of Accounting & Information Systems

Paul Hribar

University of Iowa - Henry B. Tippie College of Business

Richard Mergenthaler

The University of Arizona - Eller College of Management

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 Dean 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

University of Texas at El Paso - Department of Accounting & Information Systems ( email )

University Library - Acquisitions Department
500 West University Avenue
El Paso, TX 79968
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 (Contact Author)

The University of Arizona - Eller College of Management ( email )

Tucson, AZ 85721
United States
520-621-2929 (Phone)
520-621-3742 (Fax)

HOME PAGE: http://https://accounting.eller.arizona.edu/people/rick-mergenthaler

Kyle Peterson

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

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

Register to save articles to
your library

Register

Paper statistics

Downloads
622
Abstract Views
2,297
rank
42,252
PlumX Metrics