Two models to test FRQ determinants
The impact of European firms’ economic conditions and financial performance on accounting quality
32
because this capital market asks for high information quality. ADR is only statistically significant for Model A which has a minor capacity to explain AAA less than 1 as the authors can see on Table 8. When the authors
include all variables, the ADR sign is the opposite of that expected in both models and, once again, it is just statistically significant in Model A see Table 9.
Table 7 H 1-Economic determinants of accounting quality using AAA absolute value of Abnormal Accruals and EP Earning Persistence as dependent variable
Model A AAA Model B EP
Independent variables
Predicted sign
Coefficient OLS t-statistic
Prob. Predicted
sign Coefficient
OLS t-statistic Prob.
Intercept 0.079936 0.3847
4.780777 12.0998 ET
.. +
0.2857 27.6784
Size - -2.27E-03
+ -0.0277
-1.793716 -11.4548
ROA - a
+ 0.0000
-0.2217 SG -
-2.06E-05 +
-0.0001 -0.450616
-1.2517 SL -
-0.000393 +
1.44E-05 -0.58817
2.7707 Number of obs.
13,600 12,286
Adj. R-squared 0.1901
0.4526 Notes: Definitions of variables are given in Table 3. In TA regression, ROA is added; a Variable not included; correlation is
significant at the 0.01 level.
Table 8 H 2-Financial determinants of accounting qualityusing AAA and EP as dependent variable
Model A AAA Model B EP
Independent variables
Predicted sign
Coefficient OLS t-statistic
Prob. Predicted
sign Coefficient
OLS t-statistic Prob.
Intercept 0.051678
0.0118 97.07657
11.5334 ET ..
+ 0.6150
86.6672 DE +
2.37E-08 +
-2.48E-07 0.068442
-0.4037 ADR - -0.013077
+ 0.0010 -9.167035
0.3658 Number of obs.
13,953 12,452
Adj. R-squared 0.011468
0.381772 Notes: Definitions of variables are given in Table 3. In TA regression, ROA is added; correlation is significant at the 0.01 level.
The specific factors included in the third hypothesis are the control variables or corporate governance Big4 and Law.
For the two models, Big 4 is statistically significant and with the predicted sign: firms audited by one Big 4 have fewer AAA and they report the correct earnings even if they are high, because these firms have the best audit
services see Table 9. Law has the opposite sign from the expected in Model A because less AAA was expected in Common law
The impact of European firms’ economic conditions and financial performance on accounting quality
33
under which the legal system protects more investors so firms report the correct earnings. In Model B the sign is positive as predicted. In both situations Law is statistically significant at 1 level see Table 9.
Table 9 H 3-Economical and financial determinants of accounting quality using AAA and EP as dependent variable
Model A AAA Model B EP
Independent variables
Predicted sign
Coefficient OLS t-statistic
Prob. Predicted
sign Coefficient
OLS t-statistic Prob.
Intercept 0.10567
-0.0200 28.5896
-3.0808 ET ..
+ 0.6098
69.6995 Size -
-4.23E-03 + 0.0015
-13.75169 2.6947
ROA - a
+ -0.0001 -2.4453
SG - -6.69E-06
+ -0.0002
-0.14241 -2.1042
SL - -1.44E-04
+ 0.0000
-0.210561 3.0687
DE + 5.88E-08
+ -1.73E-07
0.170711 -0.3020
ADR - -0.000958 + -0.0037
-0.577269 -1.2741
Big4 - -0.002381 + 0.0091
-1.945754 4.2677
Law - 0.002903 + 0.0078
2.581453 3.9727
Number of obs. 13,593
12,283 Adj. R-squared
0.040425 0.3650
Notes: Definitions of variables are given in Table 3. In TA regression, ROA is added; a Variable not included; correlation is significant at the 0.01 level; correlation is significant at the 0.10 level.