Review of Accounting Studies

, Volume 13, Issue 2–3, pp 168–205

Is financial reporting shaped by equity markets or by debt markets? An international study of timeliness and conservatism



We hypothesize debt markets—not equity markets—are the primary influence on “association” metrics studied since Ball and Brown (1968 J Account Res 6:159–178). Debt markets demand high scores on timeliness, conservatism and Lev’s (1989 J Account Res 27(supplement):153–192) R2, because debt covenants utilize reported numbers. Equity markets do not rate financial reporting consistently with these metrics, because (among other things) they control for the total information incorporated in prices. Single-country studies shed little light on debt versus equity influences, in part because within-country firms operate under a homogeneous reporting regime. International data are consistent with our hypothesis. This is a fundamental issue in accounting.


Reporting quality Association studies Debt Conservatism Timeliness International 

JEL Classifications

F30 G15 G18 G32 K33 M41 


  1. Alexander, D., & Schwencke, H. R. (2003). Accounting change in Norway. European Accounting Review, 12, 549–566.CrossRefGoogle Scholar
  2. Ali, A., & Hwang, L. (2000). Country specific factors related to financial reporting and the relevance of accounting data. Journal of Accounting Research, 38, 1–21.CrossRefGoogle Scholar
  3. American Institute of Certified Public Accountants. (1970). Basic concepts and accounting principles underlying financial statements of business enterprises. In Statement of the Accounting Principles Board No. 4. New York: American Institute of Certified Public Accountants.Google Scholar
  4. Asquith, P., Beatty, A., & Weber, J. (2005). Performance pricing in bank debt contracts. Journal of Accounting and Economics, 40, 101–128.CrossRefGoogle Scholar
  5. Ball, R. (2001). Infrastructure requirements for an economically efficient system of public financial reporting and disclosure, Brookings-Wharton Papers on Financial Services, 127–169.Google Scholar
  6. Ball, R. (2004). Daimler-Benz AG: Evolution of corporate governance from a code-law “stakeholder” to a common-law “shareholder value” system. In A. Hopwood, C. Leuz, & D. Pfaff (Eds.), The economics and politics of accounting: International perspectives. Oxford: Oxford University Press.Google Scholar
  7. Ball, R. (2006). International financial reporting standards (IFRS): Pros and Cons for investors, accounting and business research (International Accounting Policy Forum), 5–27.Google Scholar
  8. Ball, R., & Brown, P. (1968). An empirical evaluation of accounting income numbers. Journal of Accounting Research, 6, 159–178.CrossRefGoogle Scholar
  9. Ball, R., & Brown, P. (1969). Portfolio theory and accounting. Journal of Accounting Research, 7, 300–323.CrossRefGoogle Scholar
  10. Ball, R., & Shivakumar, L. (2005). Earnings quality in U.K. private firms. Journal of Accounting and Economics, 39, 83–128.CrossRefGoogle Scholar
  11. Ball, R., & Shivakumar, L. (2006). The role of accruals in asymmetrically timely gain and loss recognition. Journal of Accounting Research, 42, 207–242.CrossRefGoogle Scholar
  12. Ball, R., Kothari, S. P., & Robin, A. (2000a). The effect of international institutional factors on properties of accounting earnings. Journal of Accounting & Economics, 29, 1–51.CrossRefGoogle Scholar
  13. Ball, R., Robin, A., & Wu, J. S. (2000b). Accounting standards, the institutional environment and issuer incentives: Effect on accounting conservatism in China. Asia Pacific Journal of Accounting and Economics, 7, 71–96.Google Scholar
  14. Ball, R., Robin, A., & Wu, J. S. (2003). Incentives versus standards: Properties of accounting income in four East Asian countries and implications for acceptance of IAS. Journal of Accounting & Economics, 36, 235–270.CrossRefGoogle Scholar
  15. Barth, M. E., Beaver, W. H., & Landsman, W. R. (2001). The relevance of the value relevance literature for financial accounting standard setting: Another view. Journal of Accounting and Economics, 31, 77–104.CrossRefGoogle Scholar
  16. Basu, S. (1997). The conservatism principle and asymmetric timeliness of earnings. Journal of Accounting & Economics, 24, 3–37.CrossRefGoogle Scholar
  17. Beaver, W. H., & Ryan, S. (2005). Conditional and unconditional conservatism: Concepts and modeling. Review of Accounting Studies, 10, 269–309.CrossRefGoogle Scholar
  18. Bernard, V. L., & Thomas, J. K. (1989). Post-earnings-announcement drift: Delayed price response or risk premium. Journal of Accounting Research, 27(Supplement), 1–36.CrossRefGoogle Scholar
  19. Bushman, R. M., & Piotroski, J. (2006). Financial reporting incentives for conservative accounting: The influence of legal and political institutions. Journal of Accounting & Economics, 42, 107–148.CrossRefGoogle Scholar
  20. Bushman, R. M., Piotroski, J., & Smith, A. J. (2004). What determines corporate transparency. Journal of Accounting Research, 42, 207–252.CrossRefGoogle Scholar
  21. Canning, J. B. (1929). The economics of accountancy. New York: Ronald Press.Google Scholar
  22. Chambers, R. J. (1966). Accounting, evaluation, and economic behavior. Englewood Cliffs: Prentice-Hall.Google Scholar
  23. Center for International Financial Analysis and Research (CIFAR). (1995). International Accounting and Auditing Trends. Princeton: CIFAR.Google Scholar
  24. Collins, D. W., & Kothari, S. P. (1989). An analysis of intertemporal and cross-sectional determinants of earnings response coefficients. Journal of Accounting and Economics, 11, 143–181.CrossRefGoogle Scholar
  25. Dhaliwal, D., Subramanyam, R., & Trezevant, R. (1999). Is comprehensive income superior to net income as a measure of firm performance?. Journal of Accounting and Economics, 26, 43–67.CrossRefGoogle Scholar
  26. Easton, P. E., & Zmijewski, M. E. (1989). Cross-sectional variation in the stock market response to accounting earnings announcements. Journal of Accounting and Economics, 11, 117–141.CrossRefGoogle Scholar
  27. European Federation of Accountants (FEE). (1997). FEE comparative study on conceptual accounting frameworks in Europe. Brussels: FEE.Google Scholar
  28. Financial Accounting Standards Board. (1978). Concepts Statement No. 1: Objectives of financial reporting by business enterprises. Norwalk: Financial Accounting Standards Board.Google Scholar
  29. Financial Accounting Standards Board. (1980). Concepts Statement No. 2: Qualitative characteristics of accounting information. Norwalk: Financial Accounting Standards Board.Google Scholar
  30. Gigler, F., & Hemmer, T. (1998). On the frequency, quality, and informational role of mandatory financial reports. Journal of Accounting Research, 36, 117–147.CrossRefGoogle Scholar
  31. Gilman S. (1939). Accounting concepts of profit. New York: The Ronald Press Company.Google Scholar
  32. Givoly, D., & Hayn, C. (2000). The changing time-series properties of earnings, cash flows and accruals: Has financial reporting become more conservative? Journal of Accounting & Economics, 29, 287–320.CrossRefGoogle Scholar
  33. Givoly, D., Hayn, C., & Natarajan, A. (2007). Measuring reporting conservatism. The Accounting Review, 82, 65–106.CrossRefGoogle Scholar
  34. Gray, S. (1980). International accounting differences from a security analysis perspective. Journal of Accounting Research, 18, 64–76.CrossRefGoogle Scholar
  35. Haller, A. (1998). Accounting in Germany. In P. Walton, A. Haller, & B. Raffournier (Eds.), International accounting (Chap. 4). London: International Thomson Business Press.Google Scholar
  36. Holthausen, R. W., & Watts, R. L. (2001). The relevance of the value-relevance literature for financial accounting standard setting. Journal of Accounting & Economics, 31, 3–75.CrossRefGoogle Scholar
  37. International Accounting Standards Board (IASB). (2001). Framework for the Preparation and Presentation of Financial Statements. London: IASB.Google Scholar
  38. Jensen, M. C., & Meckling, W. H. (1976). Theory of the Firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3, 305–360.CrossRefGoogle Scholar
  39. Kothari, S. P., Sloan, R. G. (1992). Information in prices about future earnings: Implications for earnings response coefficients. Journal of Accounting & Economics, 15, 143–171.CrossRefGoogle Scholar
  40. La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. (1997). Legal determinants of external finance. Journal of Finance, 52, 1131–1150.CrossRefGoogle Scholar
  41. La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. (1998). Law and finance. Journal of Political Economy, 106, 1113–1155.CrossRefGoogle Scholar
  42. Leftwich, R. (1983). Accounting information in private markets: Evidence from private lending agreements. The Accounting Review, 58, 23–42.Google Scholar
  43. Leuz, C., Nanda, D., & Wysocki, P. D. (2003). Earnings management and investor protection: An international comparison. Journal of Financial Economics, 69, 505–527.CrossRefGoogle Scholar
  44. Lev, B. (1989). On the usefulness of earnings and earnings research: Lessons and directions from two decades of empirical research. Journal of Accounting Research, 27(supplement), 153–192.CrossRefGoogle Scholar
  45. Nobes, C. (1998). Major international differences in financial reporting. In C. Nobes, & R. Parker (Eds.), Comparative international accounting (5th ed., Chap. 3). Englewood Cliffs: Prentice-Hall.Google Scholar
  46. Pae, J., Thornton, D. B., & Welker, M. (2005). The link between earnings conservatism and the price-to-book ratio. Contemporary Accounting Research, 22, 693–717.CrossRefGoogle Scholar
  47. Rajan, R. G., & Zingales, L. (2003). The great reversals: The politics of financial development in the 20th Century. Journal of Financial Economics, 69, 5–50.CrossRefGoogle Scholar
  48. Roychowdhury, S., & Watts, R. L. (2007). Asymmetric timeliness of earnings, market-to-book and conservatism in financial reporting. Journal of Accounting & Economics, 44, 2–31.CrossRefGoogle Scholar
  49. Shleifer, A., & Vishny, R. (1997). A survey of corporate governance. Journal of Finance, 52, 737–783.CrossRefGoogle Scholar
  50. Schneider, D. (1995). The history of financial reporting in Germany. In P. Walton (Eds.), European financial reporting: A history. London: Academic Press.Google Scholar
  51. Smith, C., & Warner, J. (1979). On financial contracting: An analysis of bond covenants. Journal of Financial Economics, 7, 117–161.CrossRefGoogle Scholar
  52. Vuolteenaho, T. (2000). Understanding the aggregate book-to-market ratio and its implications to current equity-premium expectations, Working Paper, Harvard University.Google Scholar
  53. Vuolteenaho, T. (2002). What drives firm-level stock returns? Journal of Finance, 57, 233–264.CrossRefGoogle Scholar
  54. Watts, R. L. (1977). Corporate financial statements: A product of the market and political processes. Australian Journal of Management, 2, 52–75.CrossRefGoogle Scholar
  55. Watts, R. L. (2003a). Conservatism in accounting part I: Explanations and implications. Accounting Horizons, 17, 207–221.CrossRefGoogle Scholar
  56. Watts, R. L.. (2003b). Conservatism in accounting part II: Evidence and research opportunities. Accounting Horizons 17.Google Scholar
  57. Watts, R. L., & Zimmerman, J. L. (1986). Positive accounting theory. Englewood Cliffs, N.J.: Prentice-Hall.Google Scholar

Copyright information

© Springer Science+Business Media, LLC 2008

Authors and Affiliations

  1. 1.Graduate School of BusinessUniversity of ChicagoChicagoUSA
  2. 2.College of BusinessRochester Institute of TechnologyRochesterUSA
  3. 3.Columbia Business SchoolColumbia UniversityNew YorkUSA

Personalised recommendations