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Precision in Accounting Information, Financial Leverage and the Value of Equity
Author(s) -
Feltham Glenn,
Robb Sean,
Zhang Ping
Publication year - 2007
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/j.1468-5957.2007.02027.x
Subject(s) - leverage (statistics) , equity (law) , accounting , accounting information system , valuation (finance) , financial accounting , debt to equity ratio , business , economics , financial ratio , econometrics , statistics , population , demography , mathematics , sociology , political science , law , nonprobability sampling
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.