Accounting Quality and Long Term Firm Value Creation for Shareholders

Abstract

This research introduces a novel, multi-dimensional framework for conceptualizing and measuring accounting quality that moves beyond traditional accruals-based
models to incorporate forward-looking, value-relevant information. We propose that
accounting quality should be evaluated not merely as faithfulness of representation but
as a strategic communication system that enhances the firm’s capacity for long-term
value creation. Our methodology employs a hybrid approach combining computational
text analysis of management discussion and analysis (MDA) sections, network analysis
of accounting policy choices, and machine learning techniques to identify patterns in
accounting disclosures that correlate with sustained shareholder value over extended
horizons. We develop the Accounting Quality Coherence Index (AQCI), which measures the internal consistency, external alignment with industry narratives, and temporal stability of a firm’s accounting communications. Our analysis of SP 500 firms
from 2010-2023 reveals that firms with higher AQCI scores demonstrate significantly
lower cost of capital, reduced earnings volatility, and superior long-term shareholder
returns, even after controlling for traditional accounting quality metrics. Furthermore,
we identify a paradoxical finding: firms that exhibit moderate, strategic complexity
in their accounting narratives—rather than maximal simplicity—achieve the strongest
long-term value outcomes, suggesting that accounting quality involves an optimal level
of communicative sophistication. This research contributes to accounting theory by
reconceptualizing quality as a dynamic, communicative capability rather than a static
property of financial statements, with implications for standard-setters, investors, and
corporate managers seeking to enhance sustainable value creation.