Timeliness and conservatism are central to financial reporting, yet what are the economic factors that determine them? In the international arena, are financial reporting properties associated with debt markets more than equity markets? And if so, what are the theoretical and practical implications?

Authors Ray Ball, University of Chicago - Graduate School of Business, Ashok Robin, Rochester Institute of Technology - College of Business, and Gil Sadka, Assistant Professor of Accounting, Columbia Business School, provide a simple test of "costly contracting" and "value relevance" theories of accounting, using data on the importance of debt and equity markets in 22 countries. Contracting theory predicts that timely loss recognition (contemporaneous incorporation of economic losses in accounting income) increases in the importance of a country's debt markets, but timely gain recognition does not. The value relevance view, that equity markets provide the sole criterion for financial reporting, predicts a positive relation between equity market size and timeliness in both gain and loss recognition. In these international data, it is debt markets - not equity markets - that explain important financial reporting properties. Conditional conservatism, in the Basu (1997) sense of asymmetrically timelier loss recognition, seems due to debt market demand. Equity markets do not appear to influence any aspect of financial reporting timeliness.