The financial reporting quality effect on European firm performance

This paper analyses whether accounting quality produces any impact on firm performance using only accounting data: the abnormal accruals methodology to evaluate accounting quality and ROA to determine firm performance. This is important because accounting information guides investment decisions (Bradshaw et al., 2004 and Verdi, 2006). For 17 European countries, findings confirm the mechanical relationship between accruals and accounting measures of performance: income increasing abnormal accruals, which mean decreasing accounting quality, will increase ROA and vice-versa. In addition, the lag effect is analysed, as per Chan et al. (2004). When current performance is compared with the abnormal accruals of the previous year, results suggest that the reverse effect does not occur for two consecutive years.