Precision in accounting information, financial leverage and the value of equity

    Authors

    G. Feltham; S. Robb;P. Zhang

    Comments

    Authors: contact us about adding a copy of your work at STARS@ucf.edu

    Abbreviated Journal Title

    J. Bus. Finan. Account.

    Keywords

    leverage; accounting precision; value of equity; EMPIRICAL-RESEARCH; DEBT; VALUATION; EARNINGS; OPTION; ANNOUNCEMENTS; COVENANTS; ACCRUALS; PROXIES; Business, Finance

    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.

    Journal Title

    Journal of Business Finance & Accounting

    Volume

    34

    Issue/Number

    7-8

    Publication Date

    1-1-2007

    Document Type

    Article

    Language

    English

    First Page

    1099

    Last Page

    1122

    WOS Identifier

    WOS:000250263800004

    ISSN

    0306-686X

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