Why More Forward-Looking Accounting Standards Can Reduce Financial Reporting Quality

Abstract

A premise of standard setters and of much empirical research is that improving the quality of accounting standards and their implementation increases information in capital markets. This paper challenges this premise and shows that there are situations in which 'better', that is, more forwardlooking, accounting standards reduce the information content of financial reports. The reason is that a forward-looking accounting standard affects the smoothness of reported earnings, which can conflict with the manager's smoothing incentive and her willingness to incorporate private information in the financial report. Although the manager could eliminate the effect by earnings management, it is too costly to do so. As a consequence, the capital market's ability to infer the financial and nonfinancial information in reported earnings declines. This finding should increase the awareness that an 'improvement' in accounting standards, without considering incentives and other information residing in firms, can adversely affect the quality of financial reporting.

Do investors value companies' mandatory nonfinancial risk disclosure? An empirical analysis of the Italian context after the EU Directive

“…We aim to investigate the possible association and interaction between financial risk disclosure and NFI from the investors' perspective. One specific strand of literature supports a substitutive effect, arguing that financial risk disclosure has a negative effect on NF risk disclosure (Ewert & Wagenhofer, 2016), as usefulness and materiality are key issues that relate to both financial and nonfinancial information. A second strand of literature posits that NF risk disclosure could not substitute (or be substituted by) the financial risk disclosure, because the two types of disclosures provide different information to investors (Hoogervorst, 2019).…”

Análise das operações descontinuadas no Brasil após adoção do IFRS 5

“…According to Ewert and Wagenhofer (2016), IASB's objective in financial reporting is to supply capital providers with information regarding the companies' expected future cash flows. Although the segregation of continuing and discontinued operations in the income statement may lead to more realistic and more meaningful projections and future comparisons, as suggested by Paul A.…”

Accounting Regulation and Financial Reporting Quality: Pre-and-Post IFRS Nigeria Evidence

“…The increasing need to improve on the quality of financial statements prompt regulators to standardise and increase coverage of the explanatory and narrative aspects of annual reports and accounts (Di Pietra, Gebhardt, McLeay, & Ronen, 2014). This can be observed by the increase in some pages and volume of annual reports occasioned by forward-looking items that may not necessarily improve FRQ (Ewert & Wagenhofer, 2015). The quest for more effective regulation is closely linked to corporate governance laws requires sufficient dynamism to provide for the complexities of the changing firms' characteristics.…”

“…Extant literature suggests that accounting regulation improves financial reporting quality (Abdulmalik & Ahmad, 2016;Ewert & Wagenhofer, 2015;Inchausti, 1997;Jones & Sharma, 2001;Wagenhofer, 2011). Palea ( 2013) examined whether IFRS affect FRQ.…”