The Impact of European Firms' Economic Conditions and Financial Performance on Accounting Quality

Abstract

In this study the authors analyse the possible effect of firms economic conditions and financial performance on accounting quality. Bradshaw, et al. (2004), Gelos & WEI (2005) stated that financial reporting quality is fundamental for investors and it affects international capital movements. Following Schipper & Vicent (2003), the authors estimated accounting quality by abnormal accruals and earnings persistence. The authors contribution consists of investigating a huge number of firms from 17 European countries using unbalanced panel data. The authors found evidence that economic conditions affect accounting quality: big firms and those with high current earnings exhibit better financial information. These results are robust because they do not depend on the accounting quality proxy, even when the authors estimated regression with economical and financial factors alone or together. Financial performance does not seem to affect accounting quality. However, this relation is not linear because in high leveraged firms, the capital structure becomes determinant.