Precision in Accounting Information, Financial Leverage and the Value of Equity

Glenn Feltham, Sean Robb and Ping Zhang

Journal of Business Finance & Accounting, 2007, vol. 34, issue 7‐8, 1099-1122

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.

Date: 2007
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https://doi.org/10.1111/j.1468-5957.2007.02027.x

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