An Investigation Of The Relationship Between Financial Risk And Accounting Method Choice

Abstract

This study examines the relationship between financial risk and management’s choice of accounting methods.  Leverage has traditionally been used as a surrogate for financial risk, but in this study, a variable measuring the firm’s debt beta is developed representing a market assessment of financial risk.  The results indicate a significant relationship between increases in financial risk and management’s decision to change accounting methods.  Also, the results indicate that debt betas do not always behave in the same manner as leverage variables, suggesting that the market considers other factors besides leverage in assessing financial risk.