UBC Theses and Dissertations
Essays on firms' accounting quality Yun, Ke
This dissertation consists of two essays that present new evidence on the determinants and consequences of accounting quality. The first essay examines the consequences of earnings quality on a firm’s use of trade credit. I use earnings smoothness, asymmetric timeliness of earnings (conservatism), and earnings management to proxy for earnings quality. Consistent with high accounting quality reducing information asymmetry between firms and stakeholders, I hypothesize and find that firms with higher accounting quality are able to obtain more trade credit from their suppliers. Using a customer-supplier paired subsample, I show that the results are robust after controlling for suppliers’ characteristics. Moreover, using the 2007–2008 financial crisis as an exogenous shock to credit supply, I show that the positive relation between trade credit and accounting quality is more pronounced during a period of credit tightening. Furthermore, I find that the characteristics of transacted products also impact the relation—the association is stronger when companies purchase services or differentiated goods. Finally, I show that the positive association is concentrated in small firms and firms without credit ratings on senior debt. Overall, the evidence suggests that high earnings quality facilitates firms’ access to trade credit from suppliers. The second essay documents the effect of stock underpricing on firms’ financial reporting quality. I use mutual fund fire sales to identify relatively underpriced stocks and use performance-matched discretionary accruals to proxy for earnings management. Using difference-in-differences tests, I find that firms subjected to mutual fund fire sales increase their level of earnings management relative to unaffected firms. I also show that the effect is greater for firms experiencing more severe underpricing, firms with higher information asymmetry, and lower stock liquidity. In addition, earnings management is more pronounced in financially constrained firms. Finally, I examine whether earnings management helps stock price recovery, but find no evidence to support this hypothesis. In sum, the second essay finds that stock underpricing adversely affects firms’ financial reporting quality, an indirect effect of the stock market that has been previously overlooked.
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