The Earnings Quality and Information Processing Effects of Accounting Consistency

Posted: 25 Jul 2012 Last revised: 19 Feb 2015

See all articles by Kyle Peterson

Kyle Peterson

University of Oregon - Charles H. Lundquist School of Business

Roy Schmardebeck

The University of Tennessee, Knoxville - Haslam College of Business, Accounting and Information Management

T. Jeffrey Wilks

Brigham Young University

Date Written: February 18, 2015

Abstract

We specify measures of accounting consistency both across time and across firms based on the textual similarity of accounting policy footnotes disclosed in 10-K filings. We first examine how these measures relate to earnings quality. Accounting consistency over time is positively associated with a number of earnings quality proxies, including earnings persistence, predictability, accrual quality, and absolute discretionary accruals. We also find that lower consistency relative to other firms in the industry is associated with larger absolute accrual model residuals. Finally, we examine the information processing effects of accounting consistency. We find that greater accounting consistency in the time-series and the cross-section is associated with lower information asymmetry, as proxied by bid-ask spread and illiquidity. Greater cross-sectional consistency is also associated with greater analyst coverage, more accurate analyst forecasts, decreased dispersion in analyst forecasts, and stronger stock return synchronicity.

Keywords: accounting policies, similarity, consistency, comparability, earnings attributes, accrual estimation, accrual quality

JEL Classification: M41

Suggested Citation

Peterson, Kyle and Schmardebeck, Roy and Wilks, Thomas Jeffrey, The Earnings Quality and Information Processing Effects of Accounting Consistency (February 18, 2015). The Accounting Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2117357 or http://dx.doi.org/10.2139/ssrn.2117357

Kyle Peterson

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

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

Roy Schmardebeck

The University of Tennessee, Knoxville - Haslam College of Business, Accounting and Information Management ( email )

The Boyd Center for Business and Economic Research
Knoxville, TN 37996
United States

Thomas Jeffrey Wilks (Contact Author)

Brigham Young University ( email )

School of Accountancy
526 Tanner Building
Provo, UT 84602 84602
United States
801-422-3930 (Phone)
801-422-0621 (Fax)

HOME PAGE: http://marriottschool.byu.edu/directory/details?id=5337

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