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Journal of Management Research
Year : 2004, Volume : 4, Issue : 3
First page : ( 156) Last page : ( 163)
Print ISSN : 0972-5814.

Fudged accounting theory and corporate leverage

Ong Audra, Hussey Roger

University of Windsor, Odette Business School, 401 Sunset Avenue, Windsor, Ontario, N9B 3P4, Canada

Abstract

This paper is a follow-up of the article Fudged Accounting Theory: Evidence from the UK in the Journal of Management Research (Ong, 2003). In that article, an analysis of the flexibility within the UK regulations, which allowed companies to use different accounting treatments for intangible assets, was illustrated to support fudged accounting theory (Murphy, 1990). This paper extends that earlier work by examining the association between corporate leverage and accounting choice in the UK at a period when the extant accounting standard for goodwill, SSAP22 Accounting for Goodwill (ASC, 1989), permitted two very different accounting treatments. As a result, other intangibles, particularly brands, could avoid the regulatory strictures. For the present study, a series of hypotheses relating to corporate leverage and capitalization of intangible assets were tested. The results of the present study support fudged accounting theory by providing evidence that there is a relationship between the widespread capitalization of goodwill/brands and the relationship with leverage. The results demonstrate that financial managers will tend to adopt accounting practices that result in stronger balance sheets.

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Keywords

Leverage, Fudged Accounting, Intangible Assets, Brands/Goodwill, Food/Drink/Media Industries, International Accounting.

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