Accruals quality and leverage adjustments

Abstract

Purpose

This paper analyses the role of accounting information quality on leverage adjustments. More specifically, the authors investigate whether a better accounting information leads to a higher speed of adjustment to the target financial leverage.

Design/methodology/approach

The authors use a two-step method. They first estimate the target financial structure and then the influence of accruals quality on the speed of adjustment to this target. The study sample consists of French listed companies in the CAC All-Tradable index. The sample contains 210 companies and 1,713 observations.

Findings

Accounting literature showed the positive influence of accounting quality on financial management. The study findings are in line with these results. The authors give evidence of that a better quality of accruals is associated with a greater speed of adjustment.

Research limitations/implications

A common limitation in this field is the use of proxies. This makes results harder to generalize. For this reason, the authors implemented several models to improve the robustness of their results.

Practical implications

The authors give evidence that firms have an incentive to disclose a good-quality accounting information. A weak accounting quality prevents firms from adjusting their leverage to their financial target and therefore reduce their value.

Social implications

This work shows the need for accounting standardization bodies to strive to produce accounting standards allowing the production of high-quality accounting information. In a teaching dimension, these results highlight the importance in corporate finance of acquiring expertise in quality accounting information analysis.

Originality/value

This work is original because the authors study the influence of accounting quality on speed of adjustments of firms operating in the same legal environment and using the same accounting standards, when previous work compared different accounting frameworks. The French context is characterized by the weakness of market mechanisms and the important role of banks. These characteristics are known to reduce the role of accounting information in financing process. This result is interesting because the authors demonstrate that firms operating in this context still have an incentive in producing high accounting quality information.

Citation

Dufour, D., Luu, P. and Teller, P. (2020), "Accruals quality and leverage adjustments", Journal of Applied Accounting Research, Vol. 21 No. 4, pp. 799-817. https://doi.org/10.1108/JAAR-06-2019-0102