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Asian Review of Financial Research, Vol., No..
pp.1516~1578
pp.1516~1578
Off-Balance Sheet Investments, Earnings Quality and Firm Leverage
Ayca Altintig Chapman University
Tomas Mantecon University of North Texas
James Conover University of North Texas
Kyojik ¡°Roy¡± Song Sungkyunkwan University
Equity method (EM) reporting of off-balance sheet investments offers managers discretion to manipulate earnings and keep the debt of their investments off their own balance sheet. Consistent with these concerns, our results suggest that the use of EM reporting negatively affects the quality of earnings information. The evidence also suggests that managers of U.S. firms take advantage of the discretion provided by the EM to conceal debt. These results are especially relevant when the investment is a joint venture. The analysis shows that financial markets incorporate into prices any expected loss of informativeness derived from the reporting of off-balance investments.
Ayca Altintig
Tomas Mantecon
James Conover
Kyojik ¡°Roy¡± Song
Equity method (EM) reporting of off-balance sheet investments offers managers discretion to manipulate earnings and keep the debt of their investments off their own balance sheet. Consistent with these concerns, our results suggest that the use of EM reporting negatively affects the quality of earnings information. The evidence also suggests that managers of U.S. firms take advantage of the discretion provided by the EM to conceal debt. These results are especially relevant when the investment is a joint venture. The analysis shows that financial markets incorporate into prices any expected loss of informativeness derived from the reporting of off-balance investments.
Off-balance sheet investments,equity method accounting,financial reporting information quality
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