Principles-Based Standards and Earnings Attributes

• In Event: Standard Setting and Regulatory Actions

Abstract

This study examines the relation between principles-based standards and earnings attributes. We create a firm-level instrument that measures the extent to which firms are impacted by principles-based standards. We find that firms’ earnings are more informative, persistent, and have a larger positive association with future cash flows when their standards are more principles-based. Our evidence is consistent with managers using the discretion provided by principles-based standards to communicate the economic substance of transactions rather than to distort earnings.

Authors

• Richard D Mergenthaler, The University of Iowa

• Paul Hribar, The University of Iowa

• David Matthew Folsom, Lehigh University

• Kyle Peterson, University of Oregon