Do creditors prefer smoother earnings? : Evidence from European private firms

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Gassen, Joachim ; Fülbier, Rolf Uwe:
Do creditors prefer smoother earnings? : Evidence from European private firms.
2014
Veranstaltung: Second International Conference of the Journal of Accounting Research (JIAR) , 6.-7. Juni 2014 , Hong Kong.
(Veranstaltungsbeitrag: Kongress/Konferenz/Symposium/Tagung , Paper )

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Abstract

We investigate the interplay between
creditor financing and the smoothness of
earnings reported by European private firm
s and document how heterogeneous debt-
contracting infrastructures across Europe mode
rate this relation. Most European private
firms are owner-manager run enterprises with
private creditors as central outside stake-
holders. In this setting we expect the smoot
hness of earnings to be positively related to
the relative importance of these stakeholders.
More importantly, we expect this relation to
be more pronounced in regimes where bankruptcy and contract enforcement costs are
higher. Finally, we hypothesize
that earnings smoothness is rela
ted negatively to the cost
of debt of firms in these countries. Our la
rge-sample empirical evidence confirms our
expectations. Our findings are consistent w
ith the accounting of European private firms
being shaped by creditor incentives and speak
to the current regulatory debate about har-
monizing the accounting standards for private firms.