Does Financial Reporting Quality Vary Across Firm Life Cycle?

64 Pages Posted: 13 Sep 2018 Last revised: 25 Oct 2018

See all articles by Gopal V. Krishnan

Gopal V. Krishnan

Bentley University

Emma-Riikka Myllymäki

Aalto University School of Business

Neerav Nagar

Indian Institute of Management Ahmedabad

Date Written: August 14, 2018

Abstract

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

Suggested Citation

Krishnan, Gopal and Myllymäki, Emma-Riikka and Nagar, Neerav, Does Financial Reporting Quality Vary Across Firm Life Cycle? (August 14, 2018). Available at SSRN: https://ssrn.com/abstract=3233512 or http://dx.doi.org/10.2139/ssrn.3233512

Gopal Krishnan (Contact Author)

Bentley University ( email )

175 Forest Street
Waltham, MA 02452
United States
781-891-2477 (Phone)

Emma-Riikka Myllymäki

Aalto University School of Business ( email )

Finland

Neerav Nagar

Indian Institute of Management Ahmedabad ( email )

Vastrapur
Ahmedabad, Gujarat 380015
India

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