Why More Forward-Looking Accounting Standards Can Reduce Financial Reporting Quality

41 Pages Posted: 20 Apr 2015

See all articles by Ralf Ewert

Ralf Ewert

University of Graz - Institute of Accounting and Auditing

Alfred Wagenhofer

University of Graz

Date Written: April 19, 2015

Abstract

A premise of standard setters and of much empirical research is that improving the quality of accounting standards and their implementation increases information in capital markets. This paper challenges this premise and shows that there are situations in which “better”, i.e., more forward-looking, accounting standards reduce the information content of financial reports. The reason is that a forward-looking accounting standard affects the smoothness of reported earnings, which can conflict with the manager’s smoothing incentive and her willingness to incorporate private information in the financial report. Although the manager could eliminate the effect by earnings management, it is too costly to do so. As a consequence, the capital market’s ability to infer the financial and non-financial information in reported earnings declines. This finding should increase the awareness that an “improvement” in accounting standards, without considering incentives and other information residing in firms, can adversely affect the quality of financial reporting.

Keywords: Accounting standards, information content of financial reports, earnings quality, earnings management, accounting smoothing.

JEL Classification: D80, G12, G14, M41, M43.

Suggested Citation

Ewert, Ralf and Wagenhofer, Alfred, Why More Forward-Looking Accounting Standards Can Reduce Financial Reporting Quality (April 19, 2015). European Accounting Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2596182

Ralf Ewert (Contact Author)

University of Graz - Institute of Accounting and Auditing ( email )

Universitaetsstr. 15/F1
Graz, A-8010
Austria
+43 (0) 316 380-3470 (Phone)
+43 (0) 316 380-9540 (Fax)

HOME PAGE: http://www.uni-graz.at/iuwp/

Alfred Wagenhofer

University of Graz ( email )

Austria
+43 316 380 3500 (Phone)
+43 316 380 9565 (Fax)

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