Is Financial Reporting Quality Affected by Economic Policy Uncertainty? Evidence from Conditional Conservatism around the World
50 Pages Posted: 16 Jun 2021
Date Written: May 12, 2021
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: Suggested Citation