Incentives and Quality
40 Pages Posted: 9 Jun 2010
Date Written: June 9, 2010
Abstract
We examine whether it is incentives or standards that determine firms’ financial reporting quality using a natural experiment in Taiwan. Before 2001, Taiwan’s Company Act required private firms with capital levels exceeding a certain threshold to file and publish audited financial statements. This requirement was rescinded in 2001 and private firms since have had discretions over financial reporting. We take advantage of this regime change and divide private firms retroactively into two groups: voluntary reporting firms, those that have continued the reporting practice after the regime change; and non-voluntary reporting firms, those that have ceased the reporting practice after the regime change. We find that financial reporting quality is higher for voluntary reporting firms than for non-voluntary reporting firms, supporting the view that reporting incentives play an important role in determining reporting quality.
Keywords: International Accounting, Accounting Standards, Reporting Quality, Loss Avoidance, Income Smoothness, Earnings Conservatism
JEL Classification: M47, M41
Suggested Citation: Suggested Citation
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