Does Financial Reporting Quality Vary Across Firm Life Cycle?
64 Pages Posted: 13 Sep 2018 Last revised: 25 Oct 2018
Date Written: August 14, 2018
We perform a comprehensive analysis on the relation between a firm’s life cycle and its financial reporting quality. Using abnormal accruals, abnormal revenues, restatements, and others, we provide evidence that there is considerable variation in financial reporting quality across the life cycle. We observe an inverted U-shaped pattern of financial reporting quality, i.e., absolute values of abnormal accruals and abnormal revenues are higher (lower) during the introduction, growth, shakeout, and decline (mature) stages. This pattern is driven by poor matching of current expenses with current revenues during the introduction and decline stages. Further, the likelihood of a restatement is higher in the introduction, shakeout, and decline stages, whereas the likelihood of an enforcement action is higher for growth firms relative to mature firms. Finally, the likelihood of a weakness in internal controls and the level of audit fees are higher for firms in the introduction and growth stages.
Keywords: Life cycle; Financial reporting; AAER; Growth; Shakeout; Audit fees
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