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Discussion Week 3: Accounting
James L. Caffrey
School of Business, Liberty University
BUSI 701 Discussion Week 3: Accounting
Dr. C. Brandt Smith, Jr
September 13, 2020
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Introduction
The Journal of Accounting has identified many areas that require research. One area in
particular that is of interest is the impact of financial reporting and disclosure on stock prices.
Important feature of a financial reporting system is the quality and frequency that firms are
required to report their financial statements. The frequency of reporting is important but can be
difficult as it affects information circumstances for public firms. There appears to be a
correlation between the impact on financial reporting, its frequency, quality and stock prices,
which this research will delve into. The research completed by Tiron-Tudor (2019) takes a look
at the purpose that accounting quality has on what type of information that is incorporated into
stock prices across a sample of diverse markets
Tiron-Tudor (2019) also suggests that transparency may be one of the guiding principles
for corporate governance, as it promotes reporting material facts in real time to the stakeholders.
Also, transparency contributes to more confidence in the corporation, as well as the management
team. Tiron-Tudor (2019) used four indicators of financial reporting quality which include; the
strength of auditing and reporting standards (SARS); the strength of investor protection; the
efficacy of corporate boards and the protection of minority shareholders’ interests. The SARS is
computed utilizing a survey that asks the leading business executives from various countries
questions on their financial auditing and reporting standards. The strength of investor protection
variable is a combination of; extent of disclosure index, extent of director liability index and the
ease of shareholder suit index Tiron-Tudor (2019). The efficiency of corporate boards is based on
surveys of business executives to questions on corporate governance and board of directors.
Lastly, the Protection of minority shareholders’ interests is computed based on questions based
on country interests of minority shareholders that are protected by regulations.
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However, Salehi (2016) discusses that financial reporting quality (FRQ) can be
interpreted as two separate approaches, which are, users’ demand and investor protection. The
user demand approach acknowledges the requirements of the users of financial data and drives
the quality of financial reporting accordingly to the end users. The investor projection approach
centers on providing further information for investment and uses the accuracy and fairness of
disclosures for shareholders as proxies for FRQ as discussed in detail by Salehi (2016).
Strauss (2019) discusses that the flow of information can severely impact the formation
of stock prices, as evidenced with the share price of Tesla. Strauss (2019) provided research that
show how the Tesla corporate communication regarding their new product line as well as the
timing of both the event itself and the market reactions in the news media influenced the
structure of the share price over time. This study is insightful as it show how the nature of market
information can influence financial news, which then allows for shaping of market reactions and
in turn can determine stock prices.
Carmelo (2016) examines whether those companies with higher corporate social
responsibility (CSR) disclosure ratings are more valued by market participants. The CSR
disclosure can have far-reaching indirect effects on the market and accounting variables such as
earnings and book value of equity Carmelo (2016). Also, the CSR can affect stock prices
indirectly because the company sustainability report may be understood by investors to be a
source of complementary data with respect to the traditional accounting values.
According to Leuz (2016) financial reporting regulations often reveal that corporate
disclosure along with the reporting, are mandated, or standardized. Therefore, according to Leuz
(2016) regulation and standardization have become central issues for financial accounting.
However, disclosure and reporting regulation is a very important policy issue that requires
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significant academic research. Leuz (2016) suggests that this further ignites demand for this type
of research and policy makers and regulators must conduct economic analyses to provide for
future regulations and standards.
When looking at the impact of financial reporting and disclosure on stock prices it is
important to be honest, accurate and socially responsible, as your fortunes will be aligned with
the God’s plan for us. As so eloquently stated in the Word of God in 2 Timothy 2:15 (English
Standard Version Bible, 2016, 2 Timothy 2:15), “Do your best to present yourself to God as one
approved, a worker who has no need to be ashamed, rightly handling the word of truth.”. Truth
and helping others in all your endeavors will certainly lead to success.
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References
Carmelo, R. (2016). Corporate social responsibility disclosure and market valuation: Evidence
from Spanish listed firms. Review of Managerial Science, 10(2), 411-435.
http://dx.doi.org.ezproxy.liberty.edu/10.1007/s11846-014-0151-7
English Standard Version Bible. (2016). Crossway Bibles.
Leuz, C. & Wysocki, P. D. (2016). The economics of disclosure and financial reporting
regulation: evidence and suggestions for future research. Journal of Accounting Research,
54(2), 525-622. https://doi-org.ezproxy.liberty.edu/10.1111/1475-679X.12115
Salehi, M. Shirazi, M. (2016). Audit committee impact on the quality of financial reporting and
disclosure: Evidence from the Tehran Stock Exchange, Management Research Review,
39(12), 1639-1662. https://doi-org.ezproxy.liberty.edu/10.1108/MRR-09-2015-0198
Strauss, N. & Smith, C. H. (2019). Buying on rumors: how financial news flows affect the share
price of Tesla. Corporate Communications: An International Journal, 24(4), 593-
607. https://doi-org.ezproxy.liberty.edu/10.1108/CCIJ-09-2018-0091
Tiron-Tudor, A. & Achim, A. M. (2019). Accounting quality and stock price informativeness: A
cross-country study. Economic Research – Ekonomska Istrazinivanja, 32(1), 2481–2499.
https://doi.org/10.1080/1331677X.2019.1650655.
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