An Empirical Investigation of the True and Fair Override

LBS Accounting Subject Area Working Paper No. ACCT031

Rock Center for Corporate Governance Working Paper No. 44

Journal of Business, Finance and Accounting, pp. 1-30, January/March 2009

49 Pages Posted: 19 Feb 2003 Last revised: 29 Sep 2009

See all articles by Gilad Livne

Gilad Livne

University of Exeter Business School

Maureen F. McNichols

Stanford University

Date Written: July 23, 2008

Abstract

The True and Fair View (TFV) concept requires UK and EU companies to depart from GAAP or the law if necessary to present a true and fair view of the corporation's financial affairs. We analyze a sample of UK public companies that invoked a TFV override during 1998-2000 to assess whether overrides are used opportunistically. We find overrides increase income and equity significantly, and firms with weaker performance and higher levels of debt employ overrides that are more costly. However, market-based tests indicate that the financial statements of such firms are not less informative than those of the control sample.

Keywords: principles- vs. rules-based accounting, earnings quality, informativeness of financial statements, true and fair override.

JEL Classification: M41

Suggested Citation

Livne, Gilad and McNichols, Maureen F., An Empirical Investigation of the True and Fair Override (July 23, 2008). LBS Accounting Subject Area Working Paper No. ACCT031, Rock Center for Corporate Governance Working Paper No. 44, Journal of Business, Finance and Accounting, pp. 1-30, January/March 2009, Available at SSRN: https://ssrn.com/abstract=380741 or http://dx.doi.org/10.2139/ssrn.380741

Gilad Livne (Contact Author)

University of Exeter Business School ( email )

Streatham Court
Rennes Drive
Exeter, EX4 4JH
United Kingdom
+44(0)1392 724436 (Phone)

Maureen F. McNichols

Stanford University ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
650-723-0833 (Phone)

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