Open AccessAn Investigation Of The Relationship Between Financial Risk And Accounting Method Choice
Author(s) -
Linda M. Nichols
Publication year - 2011
Publication title -
journal of applied business research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.149
H-Index - 22
eISSN - 2157-8834
pISSN - 0892-7626
DOI - 10.19030/jabr.v9i2.6080
Subject(s) - leverage (statistics) , operating leverage , financial risk , business , debt , financial ratio , actuarial science , economics , financial accounting , accounting , finance , accounting information system , statistics , mathematics , profitability index
This study examines the relationship between financial risk and managements choice of accounting methods. Leverage has traditionally been used as a surrogate for financial risk, but in this study, a variable measuring the firms debt beta is developed representing a market assessment of financial risk. The results indicate a significant relationship between increases in financial risk and managements decision to change accounting methods. Also, the results indicate that debt betas do not always behave in the same manner as leverage variables, suggesting that the market considers other factors besides leverage in assessing financial risk.