Precision in accounting information, financial leverage and the value of equity
Abbreviated Journal Title
J. Bus. Finan. Account.
leverage; accounting precision; value of equity; EMPIRICAL-RESEARCH; DEBT; VALUATION; EARNINGS; OPTION; ANNOUNCEMENTS; COVENANTS; ACCRUALS; PROXIES; Business, Finance
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.
Journal of Business Finance & Accounting
"Precision in accounting information, financial leverage and the value of equity" (2007). Faculty Bibliography 2000s. 7118.