An Empirical Investigation of the True and Fair Override in the United Kingdom |
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| Authors: | Gilad Livne Maureen McNichols |
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| Affiliation: | The authors are respectively from Cass Business School, London and the Graduate School of Business, Stanford University. They thank an anonymous referee, Stefan Ost, Sanjay Pareek, David Parkington, Amit Shanker and Mike Staunton of London Share Price Database for their help with data collection, and Qintao Fan and Yulin Long for their excellent research assistance. They also thank Mary Barth, Bill Beaver, Robert Bushman, Elroy Dimson, Chris Higson, Steve Monahan, Dennis Oswald, Peter Pope, L. Shivakumar, Martin Walker (editor) and Terry Warfield, as well as seminar participants at the American Accounting Association 2002 Annual Meeting, 2nd ESRC/CAIR Conference Manchester University, HKUST Summer Symposium, INSEAD, London Business School, Summer Camp of Stanford University, Tel Aviv University, University of California, at Berkeley, University of Wisconsin, Madison and Warwick University, for many helpful comments. Gilad Livne gratefully acknowledges the financial support of the Leverhulme Trust, UK, and the London Business School, and the Accounting faculty of Stanford University for their kind hospitality during summer of 2002. Maureen McNichols gratefully acknowledges the support of the Stanford Graduate School of Business. |
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| Abstract: | Abstract: The True and Fair View concept requires companies to depart from GAAP or the law if necessary to present a true and fair view of the corporation's financial affairs. We analyze UK public companies invoking a true and fair override to assess whether overrides are associated with weakened performance, earnings quality and informativeness. We find quantified overrides increase income and equity significantly, and firms that invoke more costly overrides report weaker performance. We also find that firms invoking the most costly overrides have less informative financial statements than control firms, and lower earnings quality. In contrast, firms invoking less costly overrides do not exhibit weaker performance, less informative financial statements or weaker earnings quality. These findings are relevant for the debate on principle- vs. rules-based accounting. |
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| Keywords: | principles- vs. rules-based accounting earnings quality informativeness of financial statements true and fair override |
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