Global financial crisis and perceived accounting quality: the European perspective

While extant research has examined whether weaknesses in accounting systems can potentially trigger an economic crisis, there is very little work on the issue of whether a financial crisis could potentially affect the quality of accounting. Our study explicitly examines the changes in accounting quality during the recent global financial crisis (GFC). We posit the 'risk-avoidance' and 'managerial opportunism' hypotheses to examine the quality of accounting during the GFC. Our empirical work using country level perceived accounting quality shows support for the managerial opportunism hypothesis. Perceived accounting quality declined during the GFC, especially in European countries. Further, the changes in perceived accounting quality is related to changes in financial market quality supporting the 'financial market linkage' hypothesis. There is no evidence indicating that European countries were more adversely affected after controlling for determinants of perceived accounting quality. Our main result is robust to controls for potential endogeneity.