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Precision in Accounting Information, Financial Leverage and the Value of Equity

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  • Glenn Feltham
  • Sean Robb
  • Ping Zhang

Abstract

Using an equity valuation model characterized by periodic imperfect accounting information, we examine how financial leverage affects a firm's accounting quality choice (i.e., precision). We find that the existence of financial leverage motivates firms with average to good performance to prepare accounting information with a high degree of precision. However, we conclude that when a firm is performing poorly it has an incentive to reduce accounting precision in order to lower the likelihood of both a debt covenant violation and the detection of accounting bias.

Suggested Citation

  • Glenn Feltham & Sean Robb & Ping Zhang, 2007. "Precision in Accounting Information, Financial Leverage and the Value of Equity," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 34(7‐8), pages 1099-1122, September.
    • Handle: RePEc:bla:jbfnac:v:34:y:2007:i:7-8:p:1099-1122
    DOI: 10.1111/j.1468-5957.2007.02027.x
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    References listed on IDEAS

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    Cited by:

    1. Aloke (Al) Ghosh & Doocheol Moon, 2010. "Corporate Debt Financing and Earnings Quality," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 37(5‐6), pages 538-559, June.
    2. García-Teruel, Pedro J. & Martínez-Solano, Pedro & Sánchez-Ballesta, Juan Pedro, 2014. "The role of accruals quality in the access to bank debt," Journal of Banking & Finance, Elsevier, vol. 38(C), pages 186-193.
    3. Alzoubi, Ebraheem Saleem Salem, 2018. "Audit quality, debt financing, and earnings management: Evidence from Jordan," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 30(C), pages 69-84.
    4. Gilad Livne & Maureen McNichols, 2009. "An Empirical Investigation of the True and Fair Override in the United Kingdom," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 36(1‐2), pages 1-30, January.

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