Market Consequences of Sovereign Accounting Errors

Marion Boisseau-Sierra (), Jenny Chu () and Shiva Rajgopal ()
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Marion Boisseau-Sierra: Judge Business School, University of Cambridge, Cambridge CB2 1AG, United Kingdom
Jenny Chu: Judge Business School, University of Cambridge, Cambridge CB2 1AG, United Kingdom
Shiva Rajgopal: Columbia Business School, Columbia University, New York, New York 10027

Management Science, 2024, vol. 70, issue 6, 4145-4154

Abstract: This paper investigates the market consequences of sovereign accounting errors, opening a new area of research on sovereign accounting quality in the accounting literature. Eurostat, a division of the European Commission, provides semiannual assessments of financial reports produced by the member states of the European Union (EU) and issues reservations that detail financial reporting errors. Using a sample of Eurostat reservation issuances across 28 EU countries from 2004 to 2018, we find that sovereign bond yields abnormally increase during a reservation announcement window, especially when a reservation explicitly mentions deficit or debt, when it quantifies the extent of the errors’ financial impact, or when the errors relate to recent fiscal data. Consistent with a home bias after the release of negative news, we find that domestic holdings of sovereign debt increase after the issuance of a reservation. Overall, our evidence suggests that sovereign accounting errors have significant market consequences and raises further questions for future research in sovereign accounting quality.

Keywords: public sector accounting quality; sovereign financial reporting quality; sovereign accounting errors; Eurostat reservations; sovereign bond yields; sovereign credit ratings (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:70:y:2024:i:6:p:4145-4154

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