Financial Reporting Quality and Proprietary Costs

Abstract

This study investigates the association between proprietary costs and the quality of financial reporting. Interpreting a firm’s financial reporting policy as a choice of precision (“quality”) for the disclosed accounting earnings, I find evidence that the higher the proprietary costs, the lower the precision (“quality”) of reported accounting earnings. This is consistent with analytical work in disclosure theory which suggests that, ceteris paribus, as the proprietary cost of disclosure increases, the quality of disclosure decreases.