PROPOSAL FOR ACCOUNTING AND FINANCIAL MANAGEMENT

Proposal for Accounting and Financial Management



Proposal for Accounting and Financial Management

Introduction

Accounting policy choice and incentive considerations affect the quality of accounting disclosure and the communication between firms and users of accounting information. There are cases where managers influence the reported earnings in order to maximise their interests, such as to improve their reputation and reinforce the stock returns and their compensation plans ([Fields et al., 2001] and [Hand and Skantz, 1998]). Managers also tend to influence their accounting numbers in order to meet their financial obligations and abide by the debt covenants that are set by lenders (Lambert, 2001).

The violation of debt covenants would be a negative signal of corporate performance, and would therefore have negative implications for the creditability and stock behaviour of the firm. Earnings management is also related to managers' objective to avoid political costs and attention, regulatory costs, taxes, etc. It appears that the behaviour of managers may sometimes be opportunistic, which implies that their corporate goals may be in contradiction to stakeholders' interests (Weil, Fung, Graham, & Fagotto, 2006). Overall, accounting policy choice and disclosure can be regarded as part of the contracting process ([Smith and Watts, 1992] and [Skinner, 1993]).

The informativeness of disclosed accounting information varies from firm to firm (see [Alford et al., 1993] and [Ball et al., 2000]). Firms are usually more eager to disclose good information, while they tend to delay the announcement of bad information (Aboody & Kaznik, 2000). Thus, good information is essentially reflected in stock returns when it is announced, while bad information constitutes new information to investors (Hand, Holthausen, & Leftwich, 1992). Firms with informative disclosures tend to exhibit larger analyst following and less dispersion in analyst forecasts (Lang & Lundholm, 1993).

The extent to which voluntary disclosure is effective and contributes to the efficient allocation of resources in the stock market is closely related to the credibility of the accounting information that is disclosed. The credibility of accounting disclosures can be verified by comparing managers' earnings forecasts with the actual financial results. The literature shows that the stock market responds positively to forecasts of earnings increases, but negatively to forecasts of earnings decreases (Ajinkya and Gift, 1984 B. Ajinkya and M. Gift, Corporate managers' earnings forecasts and symmetrical adjustments of market expectations, Journal of Accounting Research 22 (1984), pp. 425-444. Full Text via CrossRef[Ajinkya and Gift, 1984], [Junttila et al., 2005] and [Waymire, 1984]).

The motivation for studying the extent of disclosure of listed firms is to assess the financial characteristics of firms that provide more or less extensive accounting disclosures. The study is also motivated by the need to determine whether the provision of extensive disclosures improves the financial measures and performance of firms (see [Brown et al., 2005] and [Francis et al., 2002]). Another motivation of the study is to assist the accounting standard setting bodies when they form the regulatory framework and the disclosure requirements. The study is also motivated by the implementation of International Financial Reporting ...