Accounting in the Dual Economy

Accounting in the Dual Economy

Accounting in the Dual Economy

Accounting in the Dual Economy

Synopsis

This work explores accounting issues surrounding the dual economy, its core and periphery sectors, and its need for at least two sets of accounting standards. The authors fully explore the nature of economic dualism in terms of theories and implications, and examine the question of accounting validation in a dual economy. The impact of economic dualism on such fundamental accounting problems as income smoothing, auditor switching, and bond rating changes is also discussed, and the work concludes with an examination of public policy and standard-setting solutions to the dual economy situation.

Excerpt

Bond ratings are an important signal to be used by the investor to assess the quality and marketability of various bond issues. Essentially, they are designed to rank issues in the order of their probabilities of default. Changes in the bond rating have a positive market value if they are upgraded and a negative one if they are downgraded. For example, there is evidence that suggests that downgrades by Moody's Investors Service, Inc., and Standard and Poor's Corporation are associated with negative abnormal stock returns in the two-day window beginning the day of the press release by the rating agency. Given this impact of the rating changes, the differential results in a dual economy need to be determined for a better understanding of the phenomenon. in addition, firms in the different sectors of the economy that are facing potential changes in their bond ratings may revert to various accounting changes to improve their financial image; then, accounting-change phenomena may also differ between the two sectors of the dual economy as the opportunity structures in the two sectors differ. Therefore, the objective of this chapter is provide evidence about the differential bond-rating changes and accounting changes in the core and periphery sectors of the U.S. economy. Before presenting and discussing this evidence, the chapter explains the fundamental nature of bond- rating changes and accounting changes.

BOND-RATING changes

It is by now an established fact that individuals, firms, and governments resort to financial leverage through debt financing as a way of financing . . .

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