Causes and consequences of corporate financial reporting

Li, Xi (2010) Causes and consequences of corporate financial reporting. Doctoral thesis, University of London: London Business School.

Abstract

This thesis document consists of five chapters (originally three papers) examining various issues on firms' financial reporting decisions. In the second chapter (with original paper title "The impacts of product market competition on the quantity and quality of voluntary disclosure decisions", forthcoming at Review of Accounting Studies), I investigate the determinants of firms' financial disclosures. In specific, I examine how firms' voluntary disclosure decisions are influenced by the product market competition. Using separate measures to capture different dimensions of competition, I show that competition from potential entrants increases disclosure quantity while competition from existing rivals decreases disclosure quantity. I also find that competition enhances disclosure quality mainly through reducing the optimism in profit forecasts and reducing the pessimism in investment forecasts. In the third chapter (with original paper title "Accounting conservatism and the cost of capital: international analysis"), I investigate the capital market consequences of financial reporting. In specific, I examine the contracting benefits of accounting conservatism on international debt and equity markets. I show that firms domiciled in countries with more conservative financial reporting systems have significantly lower cost of debt and equity capital, after controlling for differences in legal institutions and securities regulations. In the fourth chapter (with original paper title "Corporate governance and restrictions in debt contracts", co-authored with Irem Tuna and Florin Vasvari both at London Business School), we investigate the interactions between corporate governance and lender governance, which have been traditionally regarded as important determinants of firms' financial reporting quality. Using a large sample of public bond and syndicated loan contracts and exploratory Principal Component Analysis to extract indicators for the quality of board and shareholder governance, we document evidence consistent with the substitution effect between corporate governance and lender governance.