Precision in Accounting Information, Financial Leverage and the Value of Equity |
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| Authors: | Glenn Feltham Sean Robb and Ping Zhang |
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| Institution: | The first author is from I. H. Asper School of Business, University of Manitoba. The second author is from Kenneth G. Dixon School of Accounting, University of Central Florida. The third author is from Joseph L. Rotman School of Management, University of Toronto. |
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| Abstract: | Abstract: 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. |
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| Keywords: | leverage accounting precision value of equity |
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