Business cycles and accounting quality

This study tests the accounting quality during booms and bust phases of business cycles along with the impact of financial regulations such as the Regulation of Fair Disclosure (2000) and the Sarbanes Oxley Act (2002). Using a cohort of 677 firms with constant data of 18 years (12186 firm annual years) from US 1500 Index for the period 1993-2010, this study uses more robust econometrics approaches such as Arelanno-Bond generalized method of moments (GMM) and system GMM in addition to Panel least square, Fixed Effects, and Random Effects models. This study finds that business cycles affect accounting quality and firms do more earnings management during expansion phases as compared to contraction phases of economic business cycles. Also, this study shows positive impact of the regulations on accounting quality. This study contributes to accounting literature through analysis of accounting quality metric, discretionary accruals based earnings management using more robust econometric technique; the system GMM.