A Balance-Sheet-Based Measure of Accounting Quality

46 Pages Posted: 17 Jan 2019

See all articles by Qi Chen

Qi Chen

Duke University - Fuqua School of Business

Katherine Schipper

Duke University - Fuqua School of Business

Ning Zhang

Queen's University, Smith School of Business

Date Written: January 14, 2019

Abstract

We develop and validate a balance sheet-based measure of accounting quality that quantifies the ability of accounting assets to measure firm-specific economic capital. The measure is based on economic theories linking a firm’s economic capital (i.e., its productive capacity) to its intrinsic value. Taking the view that reported assets on a firm’s balance sheet are the primary measure of firm-specific economic capital, we define balance sheet-based accounting quality as the degree to which accounting asset measurements reduce investors’ uncertainty about firms’ economic capital, relative to overall uncertainty. Our results suggest that accounting assets resolve a substantial portion of the uncertainty about economic capital and that our balance-sheet-based accounting quality measure is distinct from several earnings attributes sometimes associated with earnings quality. These findings support the view that it is important to assess the quality of accrual accounting by its ability to generate an informative measure of productive capacity, specifically, accounting assets.

Keywords: Balance Sheet Quality, Asset Measurement, Asset Informativeness, Economic Capital

JEL Classification: M41, G14, G32

Suggested Citation

Chen, Qi and Schipper, Katherine and Zhang, Ning, A Balance-Sheet-Based Measure of Accounting Quality (January 14, 2019). Available at SSRN: https://ssrn.com/abstract=3315505 or http://dx.doi.org/10.2139/ssrn.3315505

Qi Chen (Contact Author)

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
(919) 660-7753 (Phone)

Katherine Schipper

Duke University - Fuqua School of Business

Box 90120
Durham, NC 27708-0120
United States

Ning Zhang

Queen's University, Smith School of Business ( email )

Kingston, Ontario K7L 3N6
Canada

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