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

Author

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  • Ray Ball

    (University of Chicago)

  • Ashok Robin

    (Rochester Institute of Technology)

  • Gil Sadka

    (Columbia University)

Abstract

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) R 2, 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.

Suggested Citation

  • Ray Ball & Ashok Robin & Gil Sadka, 2008. "Is financial reporting shaped by equity markets or by debt markets? An international study of timeliness and conservatism," Review of Accounting Studies, Springer, vol. 13(2), pages 168-205, September.
    • Handle: RePEc:spr:reaccs:v:13:y:2008:i:2:d:10.1007_s11142-007-9064-x
    DOI: 10.1007/s11142-007-9064-x
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    3. William Moser & Kaye Newberry & Andy Puckett, 2011. "Bank debt covenants and firms’ responses to FAS 150 liability recognition: evidence from trust preferred stock," Review of Accounting Studies, Springer, vol. 16(2), pages 355-376, June.
    4. Annita Florou & Urska Kosi, 2015. "Does mandatory IFRS adoption facilitate debt financing?," Review of Accounting Studies, Springer, vol. 20(4), pages 1407-1456, December.
    5. Frank Heflin & Charles Hsu & Qinglu Jin, 2015. "Accounting conservatism and Street earnings," Review of Accounting Studies, Springer, vol. 20(2), pages 674-709, June.
    6. Sudarshan Jayaraman & Lakshmanan Shivakumar, 2013. "Agency-based demand for conservatism: evidence from state adoption of antitakeover laws," Review of Accounting Studies, Springer, vol. 18(1), pages 95-134, March.

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