Flexible Business Models and Firms’ Financial Reporting Practices

57 Pages Posted: 21 Feb 2014

See all articles by Thomas C. Omer

Thomas C. Omer

University of Nebraska at Lincoln - School of Accountancy

Connie D. Weaver

Texas A&M University - Department of Accounting

Jaron H. Wilde

University of Iowa - Henry B. Tippie College of Business

Date Written: February 19, 2014

Abstract

In this study, we examine whether the flexibility in a firm’s business model (i.e., the way in which the firm manages and deploys its resources) is associated with its financial reporting practices. Recent survey evidence suggests that executives view firms’ business models as a key determinant of earnings quality. The premise underlying this study is that firms with relatively more flexible business models are more likely to achieve financial reporting objectives by taking advantage of their operational and financing flexibility rather than through accrual-based earnings management. We draw on prior research to identify attributes that are associated with flexible business models and develop a within industry, within year composite measure of the flexibility of a firm’s business model. After validating the measure, we use it to test our predictions. We find that firms with flexible business models are more likely to meet or beat analysts’ consensus forecasts, but are associated with lower discretionary accruals and a lower likelihood of financial restatements. In addition, we find that flexible business model firms are significantly more likely to use stock repurchases (but not discretionary accruals) to achieve important earning benchmarks. We contribute to the literature by highlighting that firms with flexible business models are able to exploit their operational and financing flexibility (in lieu of accrual manipulation) to meet financial reporting objectives.

Keywords: Business Models, Earnings Benchmarks, Earnings Management, Resource-based view of firm

JEL Classification: G32, M41, L20

Suggested Citation

Omer, Thomas C. and Weaver, Connie D. and Wilde, Jaron H., Flexible Business Models and Firms’ Financial Reporting Practices (February 19, 2014). Available at SSRN: https://ssrn.com/abstract=2398420 or http://dx.doi.org/10.2139/ssrn.2398420

Thomas C. Omer

University of Nebraska at Lincoln - School of Accountancy ( email )

307 College of Business Administration
Lincoln, NE 68588-0488
United States

Connie D. Weaver (Contact Author)

Texas A&M University - Department of Accounting ( email )

430 Wehner
College Station, TX 77843-4353
United States

Jaron H. Wilde

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

Acquisitions
5020 Main Library
Iowa City, IA 52242-1000
United States

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