Principles-based standards and earnings attributes

David Folsom, Paul Hribar, Richard D. Mergenthaler, Kyle Peterson

Research output: Contribution to journalArticlepeer-review

13 Scopus citations

Abstract

This study examines the relation between principles-based standards and earnings attributes. We create a firm-year-specific variable that measures the extent to which firms' financial reporting is affected by principles-based standards. We find that firms' earnings are more informative and persistent and have a larger positive association with future cash flows, on average, when firms' standards are more principles based. We also find evidence that managers use the added discretion provided by principles-based standards to manage earnings when firms are near bankruptcy, issuing equity, or experiencing high growth, and if earnings are near prominent earnings benchmarks. Overall, our evidence is consistent with managers using the discretion provided by principles-based standards to communicate better the economic substance of transactions, on average, but also with some managers using the added discretion strategically when managerial incentives exist to increase reported earnings.

Original languageEnglish (US)
Pages (from-to)2592-2615
Number of pages24
JournalManagement Science
Volume63
Issue number8
DOIs
StatePublished - Aug 2017

All Science Journal Classification (ASJC) codes

  • Strategy and Management
  • Management Science and Operations Research

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