An examination of proprietary costs and their impact on the quality of financial reporting for domestic publicly listed firms for year 2000-2004

In a globalized economy where competition among firms intensifies and where the demand for greater quality of financial disclosures heightens, the need for companies to strike a balance between the preservation of their competitive position in the market and commitment to transparent financial reporting is never more imperative. In order to achieve this equilibrium, there is a need to account for all the possible disclosure related costs vis-Ã -vis the related benefits of greater transparency in financial reporting. To shed new perspective in investigating the financial reporting quality, this study investigates how a firm\u27s competitive costs affect its financial reporting quality. The researchers interpret a firm\u27s financial reporting policy as a choice precision for the disclosed accounting earnings. Literature identifies these competitive costs as those related to disclosing propriety information, hence the term proprietary cost. Using the proprietary cost theory, the researchers provide empirical evidence that the higher the proprietary costs, the lower the quality of reported accounting earnings. These findings support the disclosure theory which suggest that all else held constant, as the proprietary cost of disclosure increases, earnings quality decreases