On Business Strategy and Financial Reporting Quality

ABSTRACT This study investigates the impact of a firm’s business strategy on financial reporting quality, incorporating the moderating effects of market competition and information asymmetry. Drawing on the Miles and Snow (1978, 2003) framework, we find that Prospector firms, characterized by their focus on innovation and market expansion, exhibit lower financial reporting quality compared to Defender firms, which prioritize stability and efficiency. Our results indicate that Prospectors are more likely to manage accruals in competitive markets with high information asymmetry, where managerial discretion is elevated. In such environments, Prospectors’ working capital accruals have weaker predictive power for future cash flows and earnings, suggesting accrual management is not primarily used to convey private information about future performance. From a forensic accounting perspective, our findings underscore the importance of considering business strategy alongside environmental factors when assessing financial reporting risks. These insights are valuable for auditors, regulators, and forensic accountants evaluating reporting quality. Date Availability: Date are available from the public sources cited in the text. JEL Classifications: M41; M49.