Is Financial Reporting Quality Affected by Economic Policy Uncertainty? Evidence from Conditional Conservatism around the World

50 Pages Posted: 16 Jun 2021

See all articles by Andy C.W. Chui

Andy C.W. Chui

Hong Kong Polytechnic University

K.C. John Wei

Hong Kong Polytechnic University

Date Written: May 12, 2021

Abstract

This paper explores the relationship between economic policy uncertainty and financial reporting quality. Quality is operationalized using Ball and Shivakumar’s (2005) accruals-based measure of incremental bad news’ sensitivity. We hypothesize that increased uncertainty raises the demand for conditional conservatism that, in turns, leads to a larger incremental bad news’ sensitivity. Using firm-level data from 22 countries over 1995 to 2019, we find robust evidence that supports a positive relationship between economic policy uncertainty and incremental bad news’ sensitivity. This relationship is shaped by the prevalence of bank debt usage, judicial independence, and debt enforcement efficiency that is a measure of creditor protection.

Keywords: Economic policy uncertainty, Report quality, Conservative accounting, Capital markets, International

JEL Classification: G21, M4

Suggested Citation

Chui, Andy Chun Wai and Wei, Kuo-Chiang (John), Is Financial Reporting Quality Affected by Economic Policy Uncertainty? Evidence from Conditional Conservatism around the World (May 12, 2021). Available at SSRN: https://ssrn.com/abstract=3867001 or http://dx.doi.org/10.2139/ssrn.3867001

Andy Chun Wai Chui (Contact Author)

Hong Kong Polytechnic University ( email )

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Hung Hom, Kowloon, Kowloon
Hong Kong
(852)2766 7105 (Phone)
(852)2356 9550 (Fax)

Kuo-Chiang (John) Wei

Hong Kong Polytechnic University ( email )

11 Yuk Choi Rd
Hung Hom
Hong Kong

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